Should you choose an annuity or one lump sum

An Annuity is a method in which structured payments or equal payments are made regularly, like every month or every week.

Let’s say you are given a choice between getting $ 1,000,000 now in one lump sum, or in structured payments of $ 50,000 a year for the next 22 years. The million dollars up front may sound enticing but so does the other option if you do some basic math, so which do you take?

Money is generally worth less in the future. So the $50,000 payment you get in 22 years is not going to be worth as much as it is today. So first, we need to guess an interest rate, in this case, the rate of inflation for the next 22 years. Lets say 4% as an example. Now, we have to figure out the present value of the $50,000 times 22 years discounted by 4% and then compare it with the million bucks.

We’ll use a financial calculator to calculate the present value (PV) of an annuity for this scenario:

1. Enter n (the number of compounding periods – in this case the number of years). Press 22 and then push the N button.
2. Enter i (the interest rate per period – in this case the number of years). Press 4 and then push the i button.
3. Enter FV (the future value). It is zero. You want to know the Present Value, not the future value, right? Push 0 and then push the FV button.
4. Enter PMT (the payment). You are not making a payment, you are getting one. So you have to show a negative number. Press 50000, then the CHS (change sign button), then push the PMT button.
5. Push the PV (present value) button.
6. Answer = $722,555. This means 22 annual structured payments of 50,000 each is worth only $722,555 of today’s dollars. So you should take the million bucks in one lump sum

It is understood that money today is worth more than money tomorrow. Why? Because money today is a certainty, money tomorrow carries some risk. $100 today can be invested. Money tomorrow just sits until it is today. Time Value of Money (TVM) is an important concept in financial management. It can be used to compare many different types of investment alternatives.


Defend your bottom line during tough economic times

The signs are mounting that the United States has entered a recession — is entering a recession, or else will very soon.
I see plenty of cues in recent business news indicating that lots of business decision-makers are acting as if we’re in a recession already and rightfully so, especially with statistics such as these:

In December, the US unemployment rate rose to a two year high of 5.0%, the worst since 2005. That increase was also the largest one month increase since April of 1995. A scant 18,000 jobs were added to payrolls in December, per the US Department of Labor. 2007 was the worst year for US job creation since 2003.

During periods of economic decline, small businesses and entrepreneurs are more likely to bear the brunt. Yet the fact that conditions are changing also opens up opportunities for resourceful companies to outsmart larger competitors who, during a downturn, carry on business as usual or are unable to adapt quickly — except to layoff employees and cut costs in areas that actually end up hurting the company in the long term.

The key to success lies in being aggressive and innovative. Managers and entrepreneurs who survive and even prosper during hard times must be able to look beyond the present, to overcome the constraints of tradition and approach the business from new perspective. Here are a few strategies to focus on:

• Monitor your cash flow very diligently, and forecast it monthly to ensure that expenses and planned expenditures are in line with accounts receivable. Make sure your financial statements provide information that is timely, relevant and accurate.

• Eliminate nonessential expenses as much as possible.

• Take a closer look at capital spending. Consider delaying both the purchase of high ticket items and expansion plans that take a long time to pay off.

• Actively seek out new business. The importance of good service cannot be overstressed — especially as consumer buying power or willingness to spend is lessened during tough economic times.

• Re-examine your marketing mix to ensure it is the most cost effective.

• Get employees involved in policy choices as well as tactics and implementation that can help decrease costs. Meet with staff regularly to exchange ideas on boosting productivity and other issues. Create an incentive for good suggestions and foster a team spirit for survival.

• Develop new marketing techniques to gain market share from competitors unable to adjust to shifting market conditions.

• Maintain a strong cash stream throughout the downturn, in contrast to other companies that may have liquidity problems.

• Become a leaner, more cost-effective and more efficient operation, better positioned to do well when the market improves.

While economic downturns are difficult and increase the obstacles a business faces, it is not always a requirement that companies have to slash earnings and compress market share. That recourse occurs when companies that take too long to realize what must be done, or resist change. Resourceful business leaders capture all available opportunities and take steps during tough times to lay the groundwork for tomorrow’s prosperity.

New Year Resolutions for Entrepreneurial Companies

In this USA Today article Rhonda Abram’s shares a list of resolutions for entrepreneurial companies for 2008. Abrams, president of The Planning Shop, a publisher of books for entrepreneurs, says she’s optimistic about 2008, despite the likelihood of an unsettled economy.

Here are a few of the resolutions she shares … Notice that many of these strategies can be applied in your personal and professional endeavors as well.

Evaluate what you did right. When drawing up a list of resolutions, we usually focus on things we want to change. But you’re still here in 2008, so you did some things right in 2007. See how you can continue or increase your commitment to the positive ways you currently run your business.

Get your financial information organized. January 1 is the ideal time to start keeping better financial records. If you’re using a wordprocessing or spreadsheet program (or worse, a shoebox), get a good, easy, financial accounting program now.

Develop an annual business plan. Without a doubt, the one thing I’ve done that’s improved the health and income of my business is to develop an annual business plan. We do a full company planning session every year. Even if you do just a simple plan, sit down and figure out a plan for 2008.

Increase your efforts with best customers. If the economy turns sour in 2008, your customers are going to have to make some cuts. Make sure you’re not the one on the chopping block by working with them, serving them well, and making sure they don’t forget you.

Keep learning. Whether you work alone or have a thousand employees, you are your company’s most important asset. Go to seminars, read journals, take classes, learn new skills. Your brain is your most important business asset. Add to it.