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what is the sum of the parts valuation sotp | the sum of the parts valuation sotp is a process of valuing a company by determining what its aggregate divisions would be worth if they were spun off or acquired by another company the valuation provides a range of values for a company s equity by aggregating the standalone value of each of its business units and arriving at a single total enterprise value tev the equity value is then derived by adjusting the company s net debt and other non operating assets and expenses net debt gross debt less cash and equivalents the formula for sum of the parts valuation sotp is sotp n 1 n 2 n d n l n a where n 1 value of first segment n 2 value of second segment n d net debt n l nonoperating liabilities begin aligned text sotp n 1 n 2 dotso nd nl na textbf where n 1 text value of first segment n 2 text value of second segment nd text net debt nl text nonoperating liabilities na text nonoperating assets end aligned sotp n1 n2 nd nl nawhere n1 value of first segmentn2 value of second segmentnd net debtnl nonoperating liabilities | |
how to calculate sum of the parts valuation sotp | the value of each business unit or segment is derived separately and can be determined by any number of analysis methods for example discounted cash flow dcf valuations asset based valuations and multiples valuations using revenue operating profit or profit margins are methods utilized to value a business segment | |
what does the sotp tell you | sum of the parts valuation also known as breakup value analysis helps a company understand its true value for example you might hear that a young technology company is worth more than the sum of its parts meaning the value of the company s divisions could be worth more if they were sold to other companies in situations such as this one larger companies have the ability to take advantage of synergies and economies of scale unavailable to smaller companies enabling them to maximize a division s profitability and unlock unrealized value the sotp valuation is most commonly used to value a company comprised of business units in different industries since valuation methods differ across industries depending on the nature of revenue it is possible to use this valuation to defend against a hostile takeover by proving the company is worth more as a sum of its parts it is also possible to use this valuation in situations where a company is being revalued after a restructuring the sum of the parts valuation is also known as the breakup value as it assesses what individual segments would be worth if the company was broken up example of how to use the sum of the parts valuation sotpconsider united technologies nyse utx which said it will break the company into three units in late 2018 an aerospace elevator and building systems company using the 10 year median enterprise value to ebit ev ebit multiple for peers and 2019 operating profit projections the aerospace business is valued at 107 billion the elevator business at 36 billion and building systems business 52 billion thus the total value is 194 billion lessing out net debt and other items of 39 billion the sum of the parts valuation is 155 billion the difference between the sotp and discounted cash flow dcfwhile both are valuation tools the sotp valuation can incorporate a discounted cash flow dcf valuation that is valuing a segment of a company may be done with a dcf analysis meanwhile the dcf uses discounted future cash flows to value a business project or segment the present value of expected future cash flows is discounted using a discount rate limitations of using sum of the parts valuation sotpthe sum of the parts sotp valuation involves valuing various business segments and more valuations come with more inputs as well sotp valuations do not take into account tax implications notably the implications involved in a spinoff learn more about the sotp valuationfor help on choosing the right valuation tool check out this guide to picking the right valuation method | |
what is the sum of the parts valuation sotp | the sum of the parts valuation sotp is a process of valuing a company by determining what its aggregate divisions would be worth if they were spun off or acquired by another company the valuation provides a range of values for a company s equity by aggregating the standalone value of each of its business units and arriving at a single total enterprise value tev the equity value is then derived by adjusting the company s net debt and other non operating assets and expenses net debt gross debt less cash and equivalents the formula for sum of the parts valuation sotp is sotp n 1 n 2 n d n l n a where n 1 value of first segment n 2 value of second segment n d net debt n l nonoperating liabilities begin aligned text sotp n 1 n 2 dotso nd nl na textbf where n 1 text value of first segment n 2 text value of second segment nd text net debt nl text nonoperating liabilities na text nonoperating assets end aligned sotp n1 n2 nd nl nawhere n1 value of first segmentn2 value of second segmentnd net debtnl nonoperating liabilities | |
how to calculate sum of the parts valuation sotp | the value of each business unit or segment is derived separately and can be determined by any number of analysis methods for example discounted cash flow dcf valuations asset based valuations and multiples valuations using revenue operating profit or profit margins are methods utilized to value a business segment | |
what does the sotp tell you | sum of the parts valuation also known as breakup value analysis helps a company understand its true value for example you might hear that a young technology company is worth more than the sum of its parts meaning the value of the company s divisions could be worth more if they were sold to other companies in situations such as this one larger companies have the ability to take advantage of synergies and economies of scale unavailable to smaller companies enabling them to maximize a division s profitability and unlock unrealized value the sotp valuation is most commonly used to value a company comprised of business units in different industries since valuation methods differ across industries depending on the nature of revenue it is possible to use this valuation to defend against a hostile takeover by proving the company is worth more as a sum of its parts it is also possible to use this valuation in situations where a company is being revalued after a restructuring the sum of the parts valuation is also known as the breakup value as it assesses what individual segments would be worth if the company was broken up example of how to use the sum of the parts valuation sotpconsider united technologies nyse utx which said it will break the company into three units in late 2018 an aerospace elevator and building systems company using the 10 year median enterprise value to ebit ev ebit multiple for peers and 2019 operating profit projections the aerospace business is valued at 107 billion the elevator business at 36 billion and building systems business 52 billion thus the total value is 194 billion lessing out net debt and other items of 39 billion the sum of the parts valuation is 155 billion the difference between the sotp and discounted cash flow dcfwhile both are valuation tools the sotp valuation can incorporate a discounted cash flow dcf valuation that is valuing a segment of a company may be done with a dcf analysis meanwhile the dcf uses discounted future cash flows to value a business project or segment the present value of expected future cash flows is discounted using a discount rate limitations of using sum of the parts valuation sotpthe sum of the parts sotp valuation involves valuing various business segments and more valuations come with more inputs as well sotp valuations do not take into account tax implications notably the implications involved in a spinoff learn more about the sotp valuationfor help on choosing the right valuation tool check out this guide to picking the right valuation method | |
what is a sunk cost | a sunk cost is an expense that cannot be recovered by additional spending or investment businesses should be careful to exclude sunk costs from future decisions because they will remain the same regardless of the outcome of those decisions | |
when a business or investor spends more money trying to reverse past losses they risk succumbing to the sunk cost fallacy the expression don t send good money chasing after bad money is a caution against this type of mistake | investopedia sydney saporitounderstanding sunk costsa sunk cost refers to money that has already been spent and cannot be recovered a manufacturing firm for example may have a number of sunk costs such as the cost of machinery equipment and the lease expense on the factory sunk costs are excluded from a sell or process further decision which is a concept that applies to products that can be sold as they are or can be processed further | |
when making business decisions organizations should only consider relevant costs which include the future costs that still needed to be incurred the relevant costs are contrasted with the potential revenue of one choice compared to another to make an informed decision a business only considers the costs and revenue that will change as a result of the decision at hand because sunk costs do not change they should not be considered | businesses that continue a course of action because of the time or money already committed to an earlier decision risk falling into the sunk cost trap types of sunk costsall sunk costs are fixed costs but not all fixed costs are sunk costs the difference is that sunk costs cannot be recovered if equipment can be resold or returned at the purchase price for example it s not a sunk cost sunk costs don t only apply to businesses as individual consumers can incur sunk costs as well let s say you buy a theater ticket for 50 but at the last minute can t attend the 50 you spent would be a sunk cost but would not factor into whether or not you buy theater tickets in the future in general businesses pay more attention to fixed and sunk costs than people as both types of costs impact profits sunk costs also cover certain expenses that are committed but yet to paid imagine a company that has entered into a contract to buy 1 000 pounds of raw materials for the next six months if the company is contractually obligated to uphold their end of the deal the raw materials are a sunk cost whether the company has paid for them or not because the company will incur the costs regardless of what the company decides to do with the materials the sunk cost fallacythe sunk cost fallacy is the improper mindset a company or individual may have when working through a decision this fallacy is based on the premise that committing to the current plan is justified because resources have already been committed this mistake may result in improper long term strategic planning decisions based on short term committed costs imagine a non financial example of a college student trying to determine their major a student may declare as an accounting major only to realize after two accounting classes that this is not the career path for them the sunk cost fallacy would make the student believe committing to the accounting major is worth it because resources have already been spent on the decision in reality the student should only evaluate the courses remaining and courses required for a different major in business the sunk cost fallacy is prevalent when management refuses to deviate from original plans even when those original plans fail to materialize the sunk cost fallacy incorporates investor emotions that cause irrational decision making the sunk cost fallacy is deeply rooted in biological tendencies as researchers from the university of california san diego analyzed the sunk cost effect in humans as well as pigeons 1there s four common explanations as to why the sunk cost fallacy exists here are the psychological reasons that explain why some decision making processes fail | |
how to avoid the sunk cost fallacy | the sunk cost fallacy can easily be overcome with mindfulness dedicate and thoughtful planning here s a few pointers on overcoming the mental challenge after trading for joey gallo the new york yankees outfielder struck out 194 times over 140 games instead of continuing to stick with their decision that didn t pan out as they d hoped the yankees traded gallo in august 2022 this is an example overcoming the sunk cost fallacy 2example of sunk costsassume that xyz clothing makes baseball gloves it pays 5 000 a month for its factory lease and the machinery has been purchased outright for 25 000 the company produces a basic model of a glove that costs 50 and sells for 70 the manufacturer can sell the basic model and earn a 20 profit per unit alternatively it can continue the production process by adding 15 in costs and sell a premium model glove for 90 to make this decision the firm compares the 15 additional cost with the 20 added revenue and decides to make the premium glove in order to earn 5 more in profit the cost of the factory lease and machinery are both sunk costs and are not part of the decision making process if a sunk cost can be eliminated at some point it becomes a relevant cost and should be a part of business decisions about future events if for example xyz clothing is considering shutting down a production facility any of the sunk costs that have end dates should be included in the decision to make the decision to close the facility xyz clothing considers the revenue that would be lost if production ends as well as the costs that are also eliminated if the factory lease ends in six months the lease cost is no longer a sunk cost and should be included as an expense that can also be eliminated if the total costs are more than revenue the facility should be closed | |
what is an example of a sunk cost | imagine a company decides it needs to expand its warehouse it contacts an architect to design a new space who drafts some preliminary drawings for a fee then an economy slowdown occurs and the company is now unsure whether it should continue with the new warehouse in this example the architecture fees are an example of a sunk cost | |
are salaries a sunk cost | yes any salary that has been paid to an employee is a sunk cost as long as those wages are not recoverable that salary represents an expense that has been incurred and can not be captured back by the company | |
what is a sunk cost vs a fixed cost | in business fixed costs are expenses that have to be paid by a company independent of any specific work activities they don t apply to a company s production of any goods or services and they don t rise or fall with a change in the number of goods or services produced or sold sunk costs are a subset of fixed costs specifically a type of fixed cost that is not recoverable | |
why are sunk costs important | sunk costs are important because may act as distractors in decision making when a company analyzes costs and benefits sunk costs should have no bearing on the decision making process as the sunk cost will be incurred regardless of the outcome of the choice sunk costs are important to be mindful of because incorrectly including them in an analysis may lead to a less favorable decision being chosen the bottom lineall businesses and individuals incur sunk costs whether its the groceries already in your refrigerator the employees on a company s payroll or capital expenditure plans by your local government sunk costs are a natural part of finance these expenses are already committed to and nonrecoverable for that reason sunk costs should not be included in future decision making as the expense for the sunk cost will be exactly the same in every situation | |
what is superannuation | a superannuation is an australian pension program created by a company to benefit its employees funds deposited in a superannuation account will grow through appreciation and contributions until retirement the term super is more commonly used when referring to pension plans available in australia the u s equivalents to a superannuation plan are defined benefit and defined contribution plans understanding superannuationfunds are added to the superannuation fund by employer and potentially employee contributions this monetary fund pays out employee pension benefits as participating employees become eligible an employee is deemed to be superannuated upon reaching the proper age or as a result of infirmity at that point the employee can draw benefits from the fund a superannuation fund differs from some other retirement investment mechanisms in that the benefit available to an eligible employee is defined by a set schedule and not by the performance of the investment types of superannuation plansthere are two types of superannuation funds 1with an accumulation fund employees and employers periodically contribute to the fund so that it grows over time the funds are designed to increase by using the contributions in investment strategies to give a return on investment allowing for larger distributions 2accumulation funds are distributed to retirees based on the returns generated so the more you put into the fund and the more it grows the more you can receive in retirement superannuations are taxed differently in the u s and australia it can become complicated if you have an australian super and are subject to u s tax laws it s best to consult with a tax expert to find out your tax obligations defined benefit plans are funds that make distributions based on a formula to give a guaranteed amount of income when withdrawals begin these are similar to annuities or pension plans where employment length and salary history are considered 3benefits of superannuationa superannuation has many benefits some of the most notable are 41superannuation from multiple perspectivesa defined benefit superannuation supplies a fixed predetermined benefit depending on various factors but it is not dependent on market performance specific factors include the number of years the person was employed with the company the employee s salary and the exact age at which the employee begins to draw the benefit employers often value these benefits for their predictability from a business perspective they can be more complex to administer but they also allow for larger contributions than some u s employer sponsored plans accumulation funds are not as predictable but still rely on the same factors as defined benefit plans employers who contribute to a super account pay a set tax rate of 15 on the contributions if you re self employed you can deduct your contributions from your taxes but your super fund pays a 15 tax on them 5in a defined benefit plan upon qualifying for retirement an eligible employee receives a fixed amount it s typically distributed on a monthly basis the amount is determined by a preexisting formula in that regard the function of a superannuation is similar to receiving social security benefits upon reaching the qualifying age or under qualifying circumstances accumulation funds can increase payouts but they can also decrease them if the market doesn t cooperate employees should be cautious when choosing this type depending on what other retirement savings vehicles the employee has there may be other implications that require consideration to access the funds in the most tax efficient way possible non concessional contributions are from your after tax income and are not taxed in a super fund concessional contributions are from pre tax income and are taxed at 15 when placed in your super 6contributions made to a super from after tax income are not taxable however capital gains made in the fund are taxable under certain circumstances everyone has a super capital gains tax cap which they can claim under their non concessional gains superannuation vs other planswhile a superannuation guarantees a specific benefit once the employee qualifies other traditional retirement vehicles may not for example a defined benefit superannuation is not affected by individual investment choices but u s retirement plans such as 401 k s and individual retirement accounts iras can be affected by market fluctuations in that sense the exact benefit from an investment based retirement plan may not be as predictable as those offered by a superannuation market fluctuations do not impact the benefits of defined benefit funds but the funds in the plan are typically managed by a trustee who invests those assets in a mix of equities and fixed income securities in that sense there is some risk that a market downturn could impact the fund s solvency in such cases the plan could become underfunded meaning there are not sufficient funds to meet future obligations a person on a defined benefit plan generally will not have to be concerned with the total amount remaining in the account and is usually at low risk of running out of funds in other investment vehicles however poor performance could mean a person might run out of funds before they die companies are required to report the funding status of the plan to the appropriate tax authority annually and to make that information available to employees in the event a plan is underfunded a company may be required to provide additional funding to remedy the situation | |
what do you mean by superannuation | superannuation is an australian retirement account there are two types one that can appreciate over time and has variable payouts depending on market conditions and one that has a defined benefit payout system that is not susceptible to market fluctuations | |
what is the difference between superannuation and retirement | superannuation is a retirement account that australians can use to fund their retirement retirement is when you have built enough wealth that you don t need to work again | |
what is superannuation in salary | superannuation is a retirement fund offered by an employer in australia you and your employer contribute to this fund to help you build enough wealth to fund your retirement the bottom linea superannuation is an employer sponsored retirement account used in australia there are two versions the first is similar to defined benefit plans in the u s where the retiree receives a set amount based on a formula that accounts for time employed average salary and amount contributed the second is an accumulated fund which is similar to defined contribution plans in the u s where the benefit you receive depends on the amount you and your employer contribute and market conditions | |
what is a supplemental executive retirement plan serp | a supplemental executive retirement plan serp is a set of benefits that may be made available to top level employees in addition to those covered in the company s standard retirement savings plan a serp is a form of a deferred compensation plan it is not a qualified retirement plan that is there is no special tax treatment for the company or the employee such as is available through a 401 k plan understanding serpscompanies use serps as a way to reward and retain key executives because these plans are non qualified they can be offered selectively to key executives whose contributions to the company s qualified plan such as a 401 k must follow the maximum contributions rule set annually by the internal revenue service irs in tax year 2024 the most an employee can contribute to a 401 k is 23 000 unless they are 59 years old or older in which case they are able to make up to 7 500 in additional catch up contributions for tax year 2023 it s 22 500 and 7 500 respectively 1typically the company and the executive sign an agreement that promises the executive a certain amount of supplemental retirement income based on various eligibility conditions that the executive must meet the company funds the plan out of its current cash flows or through the funding of a cash value life insurance policy the money and the taxes on it are deferred after retiring the executive can withdraw the money they must pay state and federal taxes on it as ordinary income advantages of a serpsupplemental executive retirement plans are options for companies seeking to incentivize key executives as they are non qualified they require no irs approval and minimal reporting the company controls the plan and is able to book an annual expense equal to the present value of the stream of future benefit payments much like an annuity when the benefits are paid the company is able to deduct them as an expense | |
when a cash value life insurance policy is used to fund the benefits the company benefits from tax deferred accumulation inside the policy in most cases the policy can be structured in a way that allows the company to recover its costs | for executives the plan can be tailored to meet specific needs the benefits accrue to the executive without any current tax consequences | |
when funded with a cash value life insurance policy death benefits are available to provide a continued periodic payment or a lump sum payment to the family in the event of the executive s death depending on the details of the policy these benefits can support a surviving spouse and potentially the executive s dependents beneficiary designations are important with such policies because they supersede what is written in a will and allow assets to be distributed while an estate is in probate or even if the executive died intestate | disadvantages of a serp | |
when funding a serp the company does not receive an immediate tax deduction because the plan is unqualified | unlike with qualified plans which are protected from creditors by federal law the funds that accumulate for a serp inside a life insurance policy are not protected from creditor claims against the company in case of the company s bankruptcy | |
what happens to my serp if i quit | if you leave your job what happens to your supplemental executive retirement plan serp depends on the conditions set in your agreement with the company if your serp was based on a vesting structure and you part ways with your employer before you are fully vested then the assets you are not vested in are not yours there are two vesting structures according to the irs graded vesting and cliff vesting the former distributes assets in a set periodic schedule over time for example 20 per year whereas the latter distributes assets all at once after a certain period of time for example after an employee has worked for four years at a company 2who funds a serp the employer funds the supplemental executive retirement plan serp it is typically funded through a cash value life insurance policy which the employer purchases for an agreed upon amount for the employee the policy may have survivor benefits for the executive s beneficiaries | |
how is a serp paid out | a supplemental executive retirement plan serp is typically paid out either as a lump sum payment or as an annuity a lump sum arrives all at once which may have the impact of raising your income into a higher tax bracket an annuity is deposited over time periodically in a set schedule consider consulting with a financial professional to weigh the value of a lump sum payment versus the future value of periodic payments take your time in deciding whether a lump sum payment or an annuity is right for you the bottom linea supplemental executive retirement plan serp is a type of deferred compensation used to attract and retain high level employees as an unqualified plan that typically takes on the form of a cash value life insurance policy it doesn t come with any upfront tax benefits for the employer or employee however the company does gets tax benefits when it pays the premiums on the insurance even if the employee quits the company still has access to the insurance s cash value if the employee passes away the company is a beneficiary of the life insurance policy if you are considering a role that comes with a serp make sure your analysis takes into account all factors the assets may seem attractive but pay careful attention to the vesting schedule be realistic about your future at the company don t take a serp for granted | |
what is supply | supply is a fundamental economic concept that describes the total amount of a specific good or service that is available to consumers supply can relate to the amount available at a specific price or the amount available across a range of prices if displayed on a graph this relates closely to the demand for a good or service at a specific price all else being equal the supply provided by producers will rise if the price rises because all firms look to maximize profits understanding supplythe concept of supply in economics is complex with many mathematical formulas practical applications and contributing factors while supply can refer to anything in demand that is sold in a competitive marketplace supply is most used to refer to goods services or labor one of the most important factors that affect supply is the good s price generally if a good s price increases so will the supply there is often an inverse relationship between the price consumers are willing to pay and the price manufacturers or retailers are wanting to charge the conditions of the production of the item in supply is also significant when a technological advancement increases the quality of a good being supplied or if there is a disruptive innovation such as when a technological advancement renders a good obsolete or less in demand government regulations can also affect supply consider environmental laws regarding the extraction of oil affect the supply of such oil supply is represented in microeconomics by a number of mathematical formulas the supply function and equation express the relationship between supply and the affecting factors a wealth of information can be gleaned from a supply curve such as movements caused by a change in price shifts caused by a change that is not related to the price of the good and price elasticity history of supplysupply and demand in modern economics has been historically attributed to john locke in an early iteration as well as definitively used by adam smith s well known an inquiry into the nature and causes of the wealth of nations published in 1776 the graphical representation of supply curve data was first used in the 1800s and then popularized in the seminal textbook principles of economics by alfred marshall in 1890 1 it has long been debated why britain was the first country to embrace utilize and publish on theories of supply and demand and economics in general the advent of the industrial revolution and the ensuing british economic powerhouse which included heavy production technological innovation and an enormous amount of labor has been a well discussed cause calculating supplythe algebraic formula for supply represents the supply of an item at any given price is q s x y p where q s units supplied x quantity of units y level of activity in the market p price of each unit begin aligned qs x yp textbf where qs text units supplied x text quantity of units y text level of activity in the market p text price of each unit end aligned qs x ypwhere qs units suppliedx quantity of unitsy level of activity in the marketp price of each unit if the price of the item is zero the quantity supplied will be a negative number which indicates no supplier will be willing nor able to produce such a product at a profitable price instead at a higher price more suppliers will be willing to manufacture an item as it becomes more profitable the higher the unit price supply chain issues relate to constraints to delivering goods to the market this may refer to an adequate amount of supply not being able to be manufactured or there being distribution issues in distributing the supply related terms and conceptsthe concept of supply is engrained in many economic concepts below are several associated terms or functions of economics that interact with supply the contrasting economic concept to supply is demand demand represents the consumer s desire to obtain a product when a broad set of consumers are more willing to buy a product or service that product or service is said to have higher demand like supply demand is directly related to a given price for example most consumers would be interested in the latest smartphone if the given market price was 1 increasing the price to 1 000 shifts broad consumer desire for the product all else being equal price and demand are inversely related as one increases the other decreases the supply curve is a graphic representation of the relationship between the cost of an item and the quantity the market will supply at that cost all else being equal the supply curve is upward sloping in that as the price y axis of a good increases more market participants are willing to supply x axis economic equilibrium occurs when supply and demand are equal it is the price point when the supply curve and demand curve overlap at equilibrium the market will agree on the given market price a monopoly is a condition in which one seller controls the supply side of the market government regulation often attempts to control market conditions to ensure fair competition on the supply side this is to ensure consumers are able to buy goods at a fair price instead of a single supplier dictating what the market price will be to avoid a monopoly there must be competition this means different companies must supply similar goods to consumers consumers then must choose which items to buy competition is meant to breed price competition innovation and market control to ensure that a single market participant doesn t have too much power over consumers oversupply occurs when there is an excessive abundance of an item that consumer demand can t satiate consider an abundant harvest that results in an oversupply of crops a result impact may be reduced prices to consumers to further incentivize consumption of this good compared to a scarcer good scarcity is the opposite of oversupply consider a failed crop year ruined by inclement weather because less supply is available it may be more difficult for consumers to obtain a specific good this may be prevalent due to supply chain issues causing manufacturing delays or government policies pausing specific activity suppy elasticityprice elasticity measures how the quantity of goods available will respond to a change in the unit s price an elastic supply means that a small change in market prices will result in a relatively large change in the availability of that good from suppliers an inelastic supply refers to goods whose supply does not change significantly in response to price changes consider a product where a sudden surge of demand causes the price to increase by 10 suppliers of that product may start producing more of that product in order to take advantage of higher profit margins if the supply available increases by more than 10 the good is considered elastic if the supply increase is lower than 10 it is considered relatively inelastic elasticity can be determined from the slope of the supply function a relatively steep supply curve indicates a large response to price changes indicating an elastic supply if the supply curve appears relatively flat then supply is inelastic the elasticity of the supply function at a given point can be expressed by the formula elasticity change in supply change in price begin aligned text elasticity frac text change in supply text change in price end aligned elasticity change in price change in supply if the calculated elasticity is greater than 1 the supply of that good is considered relatively elastic if it is less than one it is considered inelastic goods that are relatively easy to produce and bring to market tend to have an elastic supply since producers can quickly respond to price changes goods whose supply is limited tend to be inelastic for example housing has an inelastic supply since it can take many years to bring new units to the market supply curvebelow is a visual depiction of supply as price y axis increases more market participants are willing to supply the product as this increases profit margin and profitability the slope of the supply curve may be steeper for items with less price sensitivity or more gradual for items more sensitive to price changes | |
when a non price determinant has an external impact on supply the entire supply curve will shift for example consider technological innovations that influence how much of a good can be delivered instead of simply being a different point along an existing curve the entire supply curve will move and a new equilibrium point will exist on the new line | law of supply and demandthe concept of supply is a cornerstone is the economic pillar of the law of supply and demand consider how consumers want to buy products for as low as possible while manufacturers retailers want to sell products for as high as possible the point at which supply and demand meet is what sets the market price the relationship between supply and demand is constantly evolving as market demands raw material constraints and consumer preferences consistently shift both curves all else being equal if the supply of a product outweighs the demand the price of the good will fall alternatively if the demand for a product outweighs the supply the price will rise these and other outcomes can be graphically depicted using both the supply and demand curves as the supply curve is upward sloping to the right and the demand curve is downward sloping to the right the two curves often intersect at the market price for a given level of supply demand movements along or shifts in the supply curve will have a residual impact on the intersecting point with demand factors that affect supplyas a consumer considers whether or not to increase production there are a number of items it must keep in mind alternatively there are considerations from the buyer and external independent parties that also dictate levels of supply factors that affect supply include types of supplyshort term supply is the inventory immediately available for consumption when short term supply has been exhausted consumers must wait for additional manufacturing or production for more goods to become available short term supply is the maximum amount consumers can immediately purchase long term supply considers consumer demand material availability capital investment and macroeconomic conditions these factors all dictate how a company should shift manufacturing to meet long term demand though long term supply may only be able to grow gradually over time suppliers have greater control over increasing or decreasing long term supply by enacting operational strategies joint supply occurs when the manufacturing of one good will result in the byproduct of another good regardless of the demand for the byproduct good it may be manufactured and supplied simply in response for demand of the other product for example the production of crude petroleum results in gasoline fuel oil kerosene and asphalt the supply of one item may increase simply due to greater demand of other items market supply refers to the daily supply of goods often with a very short term usable life for example grocery stores may measure their market supply of fresh produce or fish each of these goods is exclusively dependent on the supplier s ability to harvest these products as additional supply may be out of the control of the farmer opposite of joint supply composite supply is the offering of a product that is multiple products packaged together both products must be offered together and the maximum supply is equal to the smaller of the two products for example a company manufacturers pints of ice cream that are sold along with compostable spoons neither product is sold individually in this example the amount of composite supply is the lower of the quantity of pints of ice cream or composable spoons though the supply curve is often a curving upward sloping line there may be exceptions based on the supply and market conditions for a given product exceptions to the law of supplythe rules of the supply curve are often consistent however there are situations where the rules of supply are broken and exceptions to the economic concept yield abnormal results use of supply in macroeconomicsmoney supply refers specifically to the entire stock of currency and liquid assets in a country economists will analyze and monitor this supply formulating policies and regulations based on its fluctuation through controlling interest rates and other such measures official data on a country s money supply must be accurately recorded and made public periodically the european sovereign debt crisis which began in 2009 is a good example of the role of a country s money supply and the global economic impact global supply chain finance is another important concept related to supply in today s globalized world supply chain finance aims to effectively link all tenets of a transaction including the buyer seller financing institution and by proxy the supplier to lower overall financing costs and speed up the process of business supply chain finance is often made possible through a technology based platform and is affecting industries such as the automobile and retail sectors | |
what are the 3 types of supply | supply may be broken into total supply short term supply and long term supply each measures the amount of goods available in a market differently and different agencies may use each set of information differently | |
what factors impact supply | supply is usually most directly related to price as the price of a good increases or decreases producers may be more or less inclined to produce that good based on anticipated profit margins for a similar reason the cost of production and a company s ability to incur expenses related to increasing supply also impact supply amounts supply may be externally influenced by outside factors such as government policy consider how environmental laws place constraints on how much oil may be drilled | |
what is the importance of supply | many consumers are interested in supply because of its impact on price should a manufacturer oversupply the market consumers may receive a price discount however supply is related to so many additional important concepts an efficient supply chain minimizes delays reduces costs and helps markets perform to their full potential the bottom linea cornerstone of economic theory is the concept of supply the number of goods provided to a market for consumption the idea of supply pairs with the idea of demand and these two concepts intertwine to create a market equilibrium that often defines the prices consumers pay and the supply level manufacturers strive for | |
what is a supply chain | a supply chain is a network of individuals and companies that are involved in creating a product and delivering it to the consumer links on the chain begin with the producers of the raw materials and they end when the van delivers the finished product to the user supply chain management is a crucial process because an optimized supply chain results in lower costs and a more efficient production cycle companies seek to improve their supply chains so they can reduce their costs and remain competitive investopedia michela buttignolunderstanding a supply chaina supply chain includes every step that s involved in getting a finished product or service to the customer the steps may include sourcing raw materials moving them to production then transporting the finished products to a distribution center or retail store where they can be delivered to consumers the entities involved in the supply chain include producers vendors warehouses transportation companies distribution centers and retailers the supply chain begins operating when a business receives an order from a customer its essential functions include product development marketing operations distribution networks finance and customer service it can lower a company s overall costs and boost its profitability when supply chain management is effective it can affect the rest of the chain and can be costly if one link breaks | |
what are the main supply chain models | the supply chain model that a company selects will depend on how the company is structured and its specific needs | |
what are supply chain management best practices | successful supply chain management systems benefit from several practices supply chain management vs business logistics management the terms supply chain management scm and business logistics management or simply logistics are often used interchangeably but logistics is one link in the supply chain logistics deals with the planning and control of the movement and storage of goods and services from their point of origin to their final destination successful logistics management ensures that there s no delay in delivery at any point in the chain and that products and services are delivered in good condition this helps keep the company s costs down | |
what is the flow of manufacturing costs | efficient supply chain systems can get each piece of the product to the location where it s needed when it s needed this requires control of the flow of manufacturing costs the flow of manufacturing costs is most relevant to businesses that produce products that require many parts from several vendors a clothing manufacturer might need deliveries of fabric zippers trim and thread that must all arrive at the same time they must be stored at the business expense if some supplies arrive too early and the machines stand idle while they wait if some arrive late reliable suppliers are keyan efficient supply chain management process requires reliable suppliers that produce a product that meets the manufacturer s specifications and deliver it on time assume that xyz furniture manufactures high end furniture and that a supplier provides metal handles and other attachments the metal components must be durable so they last for many years they must meet the design and quality specified by the manufacturer and they must work as intended a reliable supplier will fill the manufacturer s order and ship the parts on time | |
does the supply chain cause deflation | the increased efficiencies of supply chains have played a significant role in curbing inflation costs decrease as efficiencies in moving products from point a to point b increase this reduces the final cost to the consumer deflation is often regarded as a negative but supply chain efficiencies are one of the few examples in which it s a good thing supply chain efficiencies become more optimized as globalization increases and this keeps the pressure on input prices | |
how did covid 19 affect the supply chain | one of the most severe economic problems caused by the covid 19 pandemic was damage to the supply chain its effects touched nearly every sector of the economy 1supplies of products of all kinds were delayed due to ever changing restrictions at national borders and long backups in ports 2demand for products changed abruptly shortages developed as consumers hoarded essentials like toilet paper and baby formula masks cleaning wipes and hand sanitizers were suddenly in demand 3shortages of computer chips delayed the delivery of a wide range of products from electronics to toys and cars 4a survey by ernst young of 200 senior level supply chain executives points to three essential findings | |
what is supply chain management | supply chain management scm is the oversight and control of all the activities required for a company to convert raw materials into finished products that are then sold to users it provides centralized control for the planning design manufacturing inventory and distribution phases required to produce and sell a company s products a goal of supply chain management is to improve efficiency by coordinating the efforts of the various entities in the supply chain this can result in a company achieving a competitive advantage over its rivals and enhancing the quality of the products it produces both can lead to increased sales and revenue | |
what are the steps in a supply chain | the key steps in a supply chain include | |
what is an example of a supply chain | a supply chain begins with the sourcing of raw materials the raw materials are then hauled to a wholesaler that sells them in batches to manufacturers the manufacturer uses the materials to create a product which is then delivered to a retailer finally it s sold to a consumer the bottom linea supply chain is what lets you plug in your new television or bite down on that hamburger you ve made at home it s a network made up of producers and manufacturers vendors warehouses transportation companies and retailers the process begins when a product is created and it ends when you purchase it many supply chains are global in scale each step in the process is complicated by the need to create prepare package ship and unpack the product at each of its successive destinations but it can result in lower costs when it s done effectively this benefit can be passed on to consumers | |
what is supply chain finance | supply chain finance scf is a term describing a set of technology based solutions that aim to lower financing costs and improve business efficiency for buyers and sellers linked in a sales transaction scf methodologies work by automating transactions and tracking invoice approval and settlement processes from initiation to completion under this paradigm buyers agree to approve their suppliers invoices for financing by a bank or other outside financier often referred to as factors and by providing short term credit that optimizes working capital and provides liquidity to both parties scf offers distinct advantages to all participants while suppliers gain quicker access to money they are owed buyers get more time to pay off their balances on either side of the equation the parties can use the cash on hand for other projects to keep their respective operations running smoothy | |
how supply chain finance works | supply chain finance works best when the buyer has a better credit rating than the seller and can consequently source capital from a bank or other financial provider at a lower cost this advantage lets buyers negotiate better terms from the seller such as extended payment schedules meanwhile the seller can unload its products more quickly to receive immediate payment from the intermediary financing body supply chain finance often referred to as supplier finance or reverse factoring encourages collaboration between buyers and sellers this philosophically counters the competitive dynamic that typically arises between these two parties after all under traditional circumstances buyers attempt to delay payment while sellers look to be paid as soon as possible example of supply chain financea typical extended payables transaction works as follows let s say the buyer company abc purchases goods from the seller supplier xyz under traditional circumstances supplier xyz ships the goods then submits an invoice to company abc which approves the payment on standard credit terms of 30 days but if supplier xyz is in dire need of cash it may request immediate payment at a discount from company abc s affiliated financial institution if this is granted that financial institution issues payment to supplier xyz and in turn extends the payment period for company abc for an additional further 30 days for a total credit term of 60 days rather than the 30 days mandated by supplier xyz supply chain finance has been primarily driven by the increasing globalization and complexity of the supply chain especially in the automotive and manufacturing industries special considerationsaccording to the global supply chain finance forum a consortium of industry associations scf has recently slowed down due to the complicated accounting and capital treatment associated with this practice mainly in response to increased regulatory and reporting requirements | |
what is supply chain management scm | supply chain management scm is the monitoring and optimization of the production and distribution of a company s products and services it seeks to improve and make more efficient all processes involved in turning raw materials and components into final products and getting them to the ultimate customer effective scm can help streamline a company s activities to eliminate waste maximize customer value and gain a competitive advantage in the marketplace investopedia alex dos diaz | |
how supply chain management scm works | scm represents an ongoing effort by companies to make their supply chains as efficient and economical as possible typically scm attempts to centrally control or link the production shipment and distribution of a product by managing the supply chain companies can cut excess costs and needless steps and deliver products to the consumer faster this is done by keeping tighter control of internal inventories internal production distribution sales and the inventories of company vendors scm is based on the idea that nearly every product that comes to market does so as the result of efforts by multiple organizations that make up a supply chain although supply chains have existed for ages a lot of companies didn t pay attention to them as a value add to their operations until recently 5 phases of supply chain management scm a supply chain manager s job is not only about traditional logistics and purchasing they have to find ways to increase efficiency and keep costs down while also avoiding shortages and preparing for unexpected contingencies typically the scm process consists of these five phases to get the best results from scm the process usually begins with planning to match supply with customer and manufacturing demands companies must try to predict what their future needs will be and act accordingly that means taking into account the raw materials or components needed during each stage of manufacturing equipment capacity and limitations and staffing needs large businesses often rely on enterprise resource planning erp software to help coordinate the process effective scm processes rely very heavily on strong relationships with suppliers sourcing entails working with vendors to supply the materials needed throughout the manufacturing process different industries will have different sourcing requirements in general scm sourcing involves ensuring that scm is especially critical when manufacturers are working with perishable goods | |
when sourcing goods companies should be mindful of lead times and how well equipped a supplier is to meet their needs | using machinery and labor to transform the raw materials or components the company has received from its suppliers into something new is the heart of the supply chain management process this final product is the ultimate goal of the manufacturing process though it is not the final stage of scm the manufacturing process may be further divided into sub tasks such as assembly testing inspection and packaging during the manufacturing process companies must be mindful of waste or other factors that may cause deviations from their original plans for example if a company is using more raw materials than planned and sourced for due to inadequate employee training it must rectify the issue or revisit the earlier stages in scm once products are made and sales are finalized a company must get those products into the hands of its customers a company with effective scm will have robust logistic capabilities and delivery channels to ensure timely safe and inexpensive delivery of its products this includes having a backup or diversified distribution methods should one method of transportation temporarily be unusable for example how might a company s delivery process be impacted by record snowfall in distribution center areas the scm process concludes with support for the product and customer returns the return process is often called reverse logistics and the company must ensure it has the capabilities to receive returned products and correctly assign refunds for them whether a company is conducting a product recall or a customer is simply not satisfied with the product the transaction with the customer must be remedied returns can also be a valuable form of feedback helping the company to identify defective or poorly designed products and to make whatever changes are necessary without addressing the underlying cause of a customer return the scm process will have failed and returns will likely persist into the future types of supply chain modelssupply chain management does not look the same for all companies each business has its own goals constraints and strengths that will shape its scm process these are some of the models a company can adopt to guide its scm efforts the continuous flow model relies on a manufacturer producing the same good over and over and expecting customer demand will show little variation one of the more traditional supply chain methods this model is often best for mature industries the agile model prioritizes flexibility as a company may have a specific need at any given moment and must be prepared to pivot accordingly this method works best for companies with unpredictable demand or custom order products this model emphasizes the quick turnover of a product with a short life cycle using a fast chain model a company strives to capitalize on a trend quickly produce goods and ensure the product is fully sold before the trend ends the flexible model works best for companies affected by seasonality some companies may have much higher demand requirements during peak season and low volume requirements in others a flexible model of supply chain management ensures that production can easily be ramped up or wound down companies competing in industries with very tight profit margins may strive to get an advantage by making their supply chain management process the most efficient that could involve coming up with ways to do a better job of utilizing equipment and machinery managing inventory and processing orders if any model above doesn t suit a company s needs it can always apply a custom model this is often necessary for highly specialized industries with high technical requirements such as an automobile manufacturer example of supply chain management scm understanding the importance of scm to its business walgreens boots alliance inc decided to transform its supply chain by investing in technology to streamline the entire process that included using big data collected from its 9 000 stores and 20 000 suppliers to help improve its forecasting capabilities and better manage sales and inventory 1 in 2019 it appointed its first ever chief supply chain officer 2walgreens boots alliance also incorporated scm into its environmental social and governance esg initiatives for example the company began asking suppliers to fill in an online survey that asks questions about their esg practices such as whether they have an emissions reduction target in place and the types of materials they use 34 | |
why is supply chain management important | supply chain management is important because it can help achieve several business objectives for instance controlling manufacturing processes can improve product quality reducing the risk of recalls and lawsuits while helping to build a strong consumer brand at the same time control over shipping procedures can improve customer service by avoiding costly shortages or periods of inventory oversupply overall supply chain management provides multiple opportunities for companies to improve their profit margins and is especially important for businesses with large and international operations | |
how are ethics and supply chain management related | ethics has become an increasingly important aspect of supply chain management even leading to the establishment of a set of principles called supply chain ethics many investors today want to know how companies produce their products treat their workforce and protect the environment as a result companies respond by instituting measures to reduce waste improve working conditions and lessen their impact on the environment all of which can involve scm | |
how much do supply chain management jobs pay | supply chain managers across the united states earn as of may 28 2024 average annual salaries in the range of 111 000 to 142 000 according to the website salary com 5the bottom linea supply chain starts with the ordering of raw materials or components from a supplier and ends with the delivery of a finished product or service to the end consumer in supply chain management every link in that chain may offer an opportunity to add value or reduce inefficiency a well run scm program can increase a company s revenues decrease its costs and bolster its bottom line | |
what is a supply curve | the supply curve illustrates the correlation between the cost of a product or service and the quantity of it that is available the supply curve is shown in a graph with the price on the left vertical axis and the quantity supplied on the horizontal axis the supply curve can be seen as a visual demonstration of how the law of supply and demand works prices increase when supply is low investopedia theresa chiechi | |
how a supply curve works | the supply curve will move upward from left to right illustrating the law of supply as the price of a given commodity increases the quantity supplied will increase all else being equal note that this formulation implies that price is the independent variable and quantity is the dependent variable in most disciplines the independent variable appears on the horizontal or x axis but economics is an exception to this rule if a factor besides price or quantity changes a new supply curve needs to be drawn for example say that more soybean farmers enter the market clearing forests and increasing the amount of land devoted to soybean cultivation in this scenario more soybeans will be produced even if the price remains the same meaning that the supply curve itself shifts to the right s2 in the graph below in other words supply will increase technology is a leading cause of supply curve shifts other factors can shift the supply curve as well such as a change in the price of production if a drought causes water prices to spike the curve will shift to the left s3 if the price of a substitute crop such as corn increases farmers will shift to growing that instead and the supply of soybeans will decrease s3 if a new technology such as a pest resistant seed increases yields the supply curve will shift right s2 if the future price of soybeans is higher than the current price the supply will temporarily shift to the left s3 since producers have an incentive to wait to sell supply curve example | |
should the price of soybeans rise farmers will have an incentive to plant less corn and more soybeans and the total quantity of soybeans on the market will increase | the degree to which rising prices translate into rising quantity is called supply elasticity or price elasticity of supply if a 50 rise in soybean prices causes the number of soybeans produced to rise by 50 the supply elasticity of soybeans is 1 on the other hand if a 50 rise in soybean prices only increases the quantity supplied by 10 the supply elasticity is 0 2 the supply curve is shallower closer to horizontal for products with more elastic supply and steeper closer to vertical for products with less elastic supply 1special considerationsthe terminology surrounding supply can be confusing quantity or quantity supplied refers to the amount of the product or service such as tons of soybeans bushels of tomatoes available hotel rooms or hours of labor in everyday usage this might be called the supply but in economic theory supply refers to the curve shown above denoting the relationship between quantity supplied and price per unit other factors can also cause changes in the supply curve such as technology any advances that increase production and make it more efficient can cause a shift to the right in the supply curve similarly market expectations and the number of sellers or competition can affect the curve as well | |
what is the law of supply and demand | the law of supply and demand is a rule of economics stating that the price of a product will reach an equilibrium based on the amount of that good that is available the supply and the amount that customers want the demand image by julie bang investopedia 2020 | |
what is the demand curve | the demand curve is the complement to the supply curve in the law of supply and demand unlike the supply curve the demand curve is downward sloping this illustrates that the higher the price of a product the less demand there will be for it all else being equal | |
what factors can affect the supply curve | the supply curve can shift based on numerous factors including changes in production or raw materials costs technological progress the level of competition the number of producers the number of sellers and changes in the regulatory and tax environment | |
what factors can affect the demand curve | demand is influenced by consumer preferences and the amount of disposable income they have to spend the presence of viable substitutes or alternatives can also shift the demand curve the bottom linethe supply curve is a literal illustration of the relationship between supply and demand the lower the supply the higher the price the demand curve is the reverse mirror image the higher the supply the lower the price | |
what is supply shock | a supply shock is an unexpected event that suddenly changes the supply of a product or commodity resulting in an unforeseen change in price supply shocks can be negative resulting in a decreased supply or positive yielding an increased supply assuming aggregate demand is unchanged a negative or adverse supply shock causes a product s price to spike upward while a positive supply shock decreases the price 1understanding supply shocka positive supply shock increases output which causes prices to decrease due to a shift in the supply curve to the right while a negative supply shock decreases production which causes prices to rise supply shocks can be created by any unexpected event that constrains output or disrupts the supply chain including natural disasters and geopolitical developments such as acts of war or terrorism 1a commodity that is widely perceived as vulnerable to negative supply shocks is crude oil because a majority of the world s supply comes from the volatile middle east region as of 2022 the organization of the petroleum exporting countries opec member nations located in the middle east africa and south america accounted for 79 5 of world oil reserves with middle east members alone accounting for 67 2 of that supply 2 oil supply has also been affected by russia s invasion of ukraine sending gas prices in the u s skyrocketing in 2022 34examples of supply shockthe struggles of a single firm can cause a supply shock if the company is a large producer of high demand products according to reportage by cnbc this was the case when glencore announced in september 2015 its plans to close two major copper mines in the democratic republic of congo and zambia removing 400 000 tonnes of copper from the global output the decision came in response to a prolonged slump in copper prices therefore this particular supply shock was positive for competing firms 5according to a report in the economist a slowdown in chinese demand for copper caused prices to drop for the previous decade demand had grown at an annual rate of more than 10 until it fell to 3 to 4 in 2015 this drop in the price of copper highlights how a concentrated change in demand can influence prices a change in demand must be abrupt and perceived as temporary to qualify as a shock as is the case on the supply side 6 | |
what does a supply shock look like | a supply shock occurs when an unpredictable event happens that suddenly either decreases or increases the supply of a product or commodity the former causes a price rise while the latter results in a price decrease | |
what kind of events cause supply shocks | they can be anything from a natural disaster to an economic recession to a pandemic to an act of war or terrorism technological breakthroughs can also be a culprit as can political acts such as the 1973 oil embargo organized by opec in response to the arab israeli war 7did the covid 19 pandemic cause supply shocks covid 19 caused both supply shocks and demand shocks for instance because of social distancing and lockdowns workers weren t able to be on manufacturing production lines so there were shortages of goods and consumers weren t going to restaurants and salons so there was a demand shock in these and other sectors 8 | |
how long do supply shocks last | supply shocks can be either temporary such as those caused by the global financial crisis of 2009 or permanent such as the introduction of fracking technology which resulted in the u s becoming a net energy exporter in 2019 the first time this had happened since 1952 according to the world bank in 2020 permanent shocks accounted for 47 of price variability with temporary ones mounting up to 53 9 | |
what is support | a support level is the price level that an asset doesn t fall below for a period of time an asset s support level is created by buyers entering the market whenever the asset dips to a lower price the simple support level can be charted in technical analysis by drawing a line along the lowest lows for the period being considered the support line can be flat or slanted up or down with the overall price trend other technical indicators and charting techniques can be used to identify more advanced versions of support | |
what do support levels tell you | support level is the level at which buyers tend to purchase or enter into a stock it refers to the stock share price that a company rarely goes below the support level holds and is confirmed when the price of a stock falls toward its support level or the stock continues to decline the previously demonstrated support level must change to incorporate the new lows when this occurs support and resistance levels are at the core of technical analysis fundamental analysis takes a company s performance and history into account to determine the future direction of the stock technical analysis uses patterns and trends in price 1support levels in stocks can be created by limit orders or the market action of traders and investors traders use support and resistance levels to plan entry and exit points for trades depending on what the trader sees from other indicators it can be an opportunity to buy in or take a short position if the price action on a chart breaches the support levels it may even be a sign of a reversal if the breach occurs on an uptrend example of how to use support levelslet s say you re studying the price history of shares in the fictional montreal trucking company with the ticker symbol mtc you re trying to identify an ideal time to enter a long position in the company mtc has traded between 7 and 15 per share over the last year the stock climbs to 15 during the second month of the period you re studying mtc but it s fallen to 7 by month 4 it climbs again to 15 by month 7 before falling to 10 in month 9 it climbs again to 15 by month 11 and it falls to 13 over the next 30 days before climbing again to 15 you ve established a support level of 7 and a resistance at 15 at this point you can set a buy order at the lower end of the range if there are no other worrying factors on the technicals or fundamentals there s a risk that an uptrend will be established if you set the order right at the support level of 7 your order may never be executed even though you correctly identified the upside it s important to consult more nuanced indicators in addition to simple support limitations of using supportsupport is more of a market concept than a true technical indicator many popular indicators incorporate these concepts including price by volume charts and moving averages these are more actionable than the simpler visualizations traders will generally want to see the support band rather than a single line connecting the lowest lows because there s always a chance that support will move up and the order for a long position will go unexecuted | |
what is trading volume | trading volume represents the number of trades that have taken place in a set period it can measure just one security or the entire market depending on your needs and goals the period is typically one day but it can be longer 2 | |
what is a moving average | a moving average is a technical indicator that reflects changes in data from one time to another it s used to try to determine the direction of a trend and is based on a variety of data it s typically calculated repeatedly over the course of a trading day and it often changes each time thus the term moving 3 | |
what is the resistance level | the resistance level is the price point at which a stock has trouble moving beyond think of the support level as the floor and the resistance level as the ceiling it s the level that occurs when supply prevents a stock from moving higher because sellers are less likely to sell 4the bottom linenumerous technical indicators can demonstrate a support level or you can simply draw a line connecting the lowest points of a stock over that period it can be a critical tool in trading those interested in learning more about support and other aspects of technical analysis may want to consider enrolling in a technical analysis course disclosure investopedia does not provide investment advice investors should consider their risk tolerance and investment objectives before making investment decisions | |
what does supranational mean | a supranational organization is a multinational union or association in which member countries cede authority and sovereignty on at least some internal matters to the group whose decisions are binding on its members in short member states share in decision making on matters that will affect each country s citizens the eu united nations and the world trade organization wto are all supranational groups to one degree or another in the eu each member votes on policies that will affect each other member nation such supranational organizations are seen by many as a better way to govern the affairs of nations with an eye to preventing conflict and promoting cooperation particularly on economic and military matters some critics particularly those with nationalist tendencies resent following internationally agreed rules and charge that adhering to the decisions of supranational organizations amounts to surrendering the sovereignty of member states and their people shifting toward a supranational approachthe creation of supranational groups marked an evolution of or a break from depending on your point of view the westphalian system in which nation states were sovereign and answered to no one whether in domestic affairs or international affairs except in the case of violence or treaties supranational thinking gained in prominence in the wake of the two world wars in the first half of the 20th century to avoid more tragic costly wars nations were increasingly willing to cede sovereignty on some issues usually related to trade and business to a vote of the members of a supranational organization the eu the closest thing to a truly supranational union the world has ever seen was created in the 1950s to prevent neighboring countries from going to war its first iteration was the european coal and steel community the european unionthe best example of a supranational entity and the closest thing to a true supranational union the world has ever seen is the eu in the europe declaration of 1951 the founders of the first iteration of the eu the european coal and steel community claimed to be creating the first supranational institution and thus laying the true foundation of an organized europe following world war ii albert einstein even advocated for a supranational organization that would control military forces einstein suggested the organization include the u s soviet union and great britain but such an organization was never formed the eu has evolved dramatically in the seven decades since the founding of the european coal and steel community but its growth hasn t come without pain a populist backlash over economic insecurity and globalization led people of great britain to take the unprecedented step of voting to leave the eu in 2016 | |
what is a surcharge | a surcharge is an additional charge fee or tax that is added to the cost of a good or service beyond the initially quoted price a surcharge is often added to an existing tax and is not included in the stated price of the good or service the amount of a surcharge varies and can be a fixed amount or a percentage this charge may be imposed because of a governing body s need for additional revenue or to defray the cost of increased commodity pricing | |
how surcharges work | surcharges are additional fees and or taxes that consumers are required to pay when they buy certain goods and services surcharges are typically added at the final stage of purchase when the buyer pays for the good or service surcharges may be set at specific dollar amounts such as 5 per transaction they may also be based on a percentage of the total price such as 5 the listed cost of some products and services does not include the added surcharge instead the calculated fee is assessed upon acceptance or purchase of the item and appears in the contract or sales and purchase agreement spa or the surcharge appears as a separate line item on your receipt some surcharges are simply baked into the nature of the business for example restaurants may intentionally not serve condiment packets as their business model may try to reduce costs by not handing out additional resources for free bank and credit card surchargesthe automated teller machine atm fee is one that many consumers know very well this surcharge is most often levied by the bank or other institution that owns and operates the machine an atm fee is shown as a set dollar amount per transaction most atm providers waive fees for customers of the sponsoring atm some businesses have added surcharges to compensate for the costs associated with accepting credit cards another name for these fees is a checkout fee this additional fee may be a specific dollar amount or a percentage of the total price of the goods or services purchased examples of surchargesmany industries such as the telecommunications and cable industries regularly use surcharges to offset some of the costs imposed on businesses through local state or federal regulations when these costs increase companies may adjust surcharge amounts rather than the price of the goods they sell the fee is still passed on to the consumer but in a more indirect fashion if regulations raise the burden on a company by 1 per customer the company may increase its regulatory recovery fee by 1 in this way the company avoids having to absorb the loss or the full amount of the government fee efficiently passing it on to the consumer examples of surcharges include regulatory recovery fees added by cable companies to their customer s bills these are imposed to offset the burden of certain service fees imposed by various government entities they also apply fees for sports programming to offset the premium the cable provider pays for the ability to broadcast the events other examples include most surcharges are legal though some states are taking action and disallowing certain types of surcharges for instance 2021 legislation out of colorado imposed limits on how much a surcharge could be in certain cases | |
how to avoid surcharges | there are a number of steps a consumer can take to avoid surcharges regardless of the type or situation in which it occurs for financial surcharges many merchants add a surcharge if you pay with a credit card especially if it s a small transaction to avoid this surcharge you can use a debit card or pay in cash some surcharges arise due to being out of network for example if you use an atm that s not affiliated with your bank you may be charged a surcharge to avoid this understand the limitations of the service and ask your bank or other network about your options always ensure receiving this information back in written form to substantiate any future confusion surcharges often arise when you travel such as an airline surcharge for checked baggage roaming surcharges for using data in remote or international locations or resort surcharges for additional amenities consider planning ahead being mindful of where these charges may arise and act accordingly by intentionally deciding against using companies with surcharges lastly always remember to read the fine print and terms and conditions regardless of what a customer service representative may tell you you are bound to any agreement you have signed this agreement will directly identify areas where you may face additional charges as you should use it not only as a planning tool but as a reference for future activity | |
how do surcharges work | surcharges are additional fees or taxes that are added to the purchase price of goods and services depending on the good or service a surcharge can be flat fees or a percentage of the purchase price it is added at the time of purchase by the seller or service provider surcharges are imposed by businesses governments service providers and service professionals | |
what is a broadcast tv surcharge | television networks impose broadcast tv surcharges on cable providers to carry their signals over the airwaves the fee is negotiable between networks and cable companies and is allowed by federal law rather than increase the price of the service the surcharge is passed on to cable company customers each month | |
what are some examples of surcharges | examples of surcharges include atm fees fuel surcharges broadcast tv surcharges disposal fees handling fees hazardous waste fees filing fees tips and gratuities processing fees convenience fees and checkout fees | |
which states allow credit card surcharges | credit card surcharging is a fee structure that allows credit card companies to charge consumers to process transactions although surcharging isn t illegal across the united states there are certain jurisdictions where companies can t impose these fees on their customers including connecticut massachusetts and puerto rico anti surcharging laws are limited or cannot be enforced in california florida kansas maine new york oklahoma texas and utah the bottom linemany people pay surcharges without the blink of an eye but not everyone understands what they are and why they re imposed surcharges are fees that are tacked onto the price of goods and services surcharges are either a fixed amount or a percentage of the purchase price they come in many forms including service fees handling fees disposal fees and processing fees they may be imposed by the service provider or another entity including the government whether you like them or not there s no way to avoid them but understanding what they are may be able to help you be comfortable with the extra cost | |
what is a surety | a surety is a promise or agreement made by one party that debts and financial obligations will be paid in effect a surety acts as a guarantee that a person or an organization assumes responsibility for fulfilling financial obligations in the event that the debtor defaults and is unable to make payments the party that guarantees the debt is referred to as the surety or the guarantor sureties can be made by issuing surety bonds which are legal contracts obligating one party to pay if the other fails to live up to the agreement | |
how sureties work | as noted above a surety is a guarantee or promise that assures payment through a legally binding contract under the agreement one party promises to fulfill the financial obligations if the second party the debtor fails to pay the third party the creditor the surety is the company that provides a line of credit to guarantee payment of any claim they provide a financial guarantee to the obligee that the principal will fulfill their obligations a principal s obligations could mean complying with state laws and regulations pertaining to a specific business license or meeting the terms of a construction contract an example of such a contract would be when a surety company vets and hires an administrator to handle a will or estate if the principal fails to deliver on the terms of the contract entered into with the obligee then the obligee has the right to file a claim against the bond to recover any damages or losses incurred if the claim is valid the surety company will pay reparation that cannot exceed the bond amount the underwriters will then expect the principal to reimburse them for any claims paid a surety is most common in contracts in which one party questions whether the counterparty in the contract will be able to fulfill all requirements the party may require the counterparty to come forward with a guarantor to reduce risk with the guarantor entering into a contract of suretyship this is intended to lower risk to the lender which might in turn lower interest rates for the borrower a surety can be in the form of a surety bond the claim amount in a surety is still retrieved from the principal either through collateral posted by the principal or through other means special considerationsa surety is not a bank guarantee similarly it is not an insurance policy where the surety is liable for any performance risk posed by the principal the bank guarantee is liable for the financial risk of the contracted project the payment made to the surety company is paying for the bond but the principal is still liable for the debt the surety is only required to relieve the obligee of the time and resources that will be used to recover any loss or damage from a principal surety bondsa surety bond is a legally binding contract it is used as an assurance that the issuer will pay any debts if the other party fails to do so 1 surety bonds are entered into by three parties here s how it works the principal is responsible for securing the surety bond which must abide by certain conditions including the total amount owed if the principal defaults or breaks the contract the obligee who is owed the money can file a claim seeking restitution the surety or the party issuing the bond can review the claim and make a determination if the claim is paid the surety can then seek financial compensation from the principal this includes interest and fees on top of the principal balance surety bonds can be used in a number of different circumstances the table below outlines some of the most common types of surety bonds | |
what is the purpose of a surety | a surety is the guarantee of the debts of one party by another this is intended to lower risk to the lender which might in turn lower interest rates for the borrower | |
what is a surety limit | a surety bond protects an obligee against losses up to the limit of the bond the bond amount is the monetary limit up to which the obligee requires the bond to be issued | |
what are the benefits available to a surety | surety bonds provide a defense against false claims and act as clear cut representation when claims occur because surety bonds also lower risk for lenders they can reduce interest rates for borrowers the bottom linea surety is a person or party that takes responsibility for the debt default or other financial responsibilities of another party a surety is often used in contracts in which one party s financial holdings or well being are in question and the other party wants a guarantor surety bonds are financial instruments that tie the principal the obligee often a government entity and the surety in the case of surety bonds the surety is providing a line of credit to the principal so as to reassure the obligee that the principal will fulfill their side of the agreement | |
what is a surplus | a surplus describes the amount of an asset or resource that exceeds the portion that s actively utilized a surplus can refer to a host of different items including income profits capital and goods in the context of inventories a surplus describes products that remain sitting on store shelves unpurchased in budgetary contexts a surplus occurs when income earned exceeds expenses paid a budget surplus can also occur within governments when there s leftover tax revenue after all government programs are fully financed investopedia matthew collinsunderstanding a surplusa surplus isn t necessarily desirable for example a manufacturer who over projects future demand for a given product may create too many unsold units which may consequently contribute to quarterly or annual financial losses a surplus of perishable commodities like grains could cause a permanent loss as inventory spoils and the items become unsellable economic surplusthere are two types of economic surplus consumer surplus and producer surplus as a rule consumer surplus and producer surplus are mutually exclusive in that what s good for one is bad for the other a consumer surplus occurs when the price for a product or service is lower than the highest price a consumer would willingly pay think of an art auction where a buyer holds in his mind a price limit he will not exceed for a certain painting he fancies a consumer surplus occurs if this buyer ultimately purchases the artwork for less than his predetermined limit in another example let s assume the price per barrel of oil drops causing gas prices to dip below the price a driver is accustomed to shelling out at the pump in this case the consumer profits from a surplus a producer surplus occurs when goods are sold at a higher price than the lowest price the producer was willing to sell for in the same auction context if an auction house sets the opening bid at the lowest price it would comfortably sell a painting a producer surplus occurs if buyers create a bidding war thus causing the item to sell for a higher price far above the opening minimum reasons for a surplusa surplus occurs when there is some sort of disconnect between supply and demand for a product or when some people are willing to pay more for a product than others hypothetically speaking if there were a set price for a certain popular toy that everyone was unanimously expected and willing to pay neither a surplus nor a shortage would occur but this rarely happens in practice because various people and businesses have different price thresholds both when buying and selling sellers are constantly competing with other vendors to move as much product as possible at the best price they can reasonably obtain if demand for the product spikes the vendor offering the lowest price may run out of supply which tends to result in general market price increases causing a producer surplus the opposite occurs if prices go down and supply is high but there is not enough demand consequently resulting in a consumer surplus surpluses often occur when the cost of a product is initially set too high and nobody is willing to pay that price in such instances companies often sell the product at a lower cost than initially hoped in order to move stock 2001 was the last year the u s federal government had a budget surplus 1results of a surplusa surplus causes a market disequilibrium in the supply and demand of a product this imbalance means that the product cannot efficiently flow through the market fortunately the cycle of surplus and shortage has a way of balancing itself out sometimes to remedy this imbalance the government will step in and implement a price floor or set a minimum price for which a good must be sold this often results in higher prices than consumers have been paying thus benefiting the businesses more often than not government intervention is not necessary as this imbalance tends to naturally correct when producers have a surplus of supply they must sell the product at lower prices consequently more consumers will purchase the product now that it s cheaper this results in supply shortages if producers cannot meet consumer demand a shortage in supply causes prices to go back up consequently causing consumers to turn away from the products because of high prices and the cycle continues budget surpluses are most likely during periods of economic growth during recessions when consumer demand declines budget deficits typically follow surplus vs deficita deficit is essentially the opposite of a surplus a deficit occurs when expenses exceed revenues imports exceed exports or liabilities exceed assets resulting in a negative balance just as a surplus is not always a positive sign deficits are not always unintentional or the sign of a government or business that s in financial trouble businesses may deliberately run budget deficits to maximize future earnings opportunities such as retaining employees during slow months to ensure themselves of an adequate workforce in busier times on the surface a surplus is preferable to a deficit however this is an overly simplistic assumption for example a trade deficit is not inherently bad as it can be indicative of a strong economy deficits do carry risks if not handled properly or are coupled with a large amount of debt in the corporate world running a deficit for too long a period can reduce a company s share value or even put it out of business | |
what is an example of a surplus | take this example of a consumer surplus let s say that you bought an airline ticket for a flight to miami during school vacation week for 100 but you were expecting and willing to pay 300 for that ticket the 200 represents your consumer surplus | |
what is a surplus in economics | a surplus in economics can be either a consumer surplus or a producer surplus consumer surplus occurs when the price for a product or service is lower than the highest price a consumer would willingly pay a producer surplus is when goods are sold at a higher price than the lowest price the producer was willing to sell for | |
what is a surplus auction | surplus auctions are a way that the federal government state and local governments and their agencies can dispose of surplus property which can include everything from office furniture to heavy machinery vehicles and even aircraft if this property cannot be donated to another agency or a nonprofit organization the general public can buy it in an auction 2 | |
how do you calculate a surplus | surplus is the amount of an asset or resource that exceeds the portion that is utilized to calculate consumer surplus for example just subtract the actual price the consumer paid from the amount they were willing to pay the bottom linea surplus generally speaking occurs when there is more of something than is needed at first glance that might sound like a positive for everyone however in reality when there s a disconnect between supply and demand somebody inevitably suffers and it doesn t always end well for example when a business has excess stock and is forced to cut prices to offload what it cannot sell its profits tighten and its stakeholders suffer while consumers happily capitalize conversely a producer surplus works the other way around benefiting the business and squeezing the income of consumers ideally a balance is struck to keep all parties happy sometimes market dynamics can stray though and even lead to a nasty recession if equilibrium isn t restored in time | |
what is surplus lines insurance | surplus lines insurance protects against a financial risk that is too great or too uncommon for a regular insurance company to take on surplus lines insurance can be purchased by individuals or companies understanding surplus lines insurancesurplus lines insurance falls into the category of property and casualty insurance in many cases it is used to cover relatively new risks that conventional insurers shy away from because they lack historical data to properly price their policies after the new coverage has generated sufficient data it may become a more standard product and become available in the admitted market the national association of insurance commissioners naic says 1unlike most types of insurance surplus lines insurance can be sold by insurers that are not licensed in the buyer s state however the surplus lines insurer must have a license in the state where it is based and the brokers who sell surplus lines insurance must be licensed in their own state surplus lines insurance carries additional risk for the policyholder there is no guaranty fund from which to obtain a claim payment if the surplus lines insurer goes bankrupt as is the case with standard insurance policies a policyholder s claim on a regular insurance policy is often paid out of a state guaranty fund which is funded by other insurers in case one of them goes bankrupt however according to the naic the insolvency rate of surplus lines insurers has been historically low 1who sells surplus lines insurance the surplus lines insurance market is heavily dominated by insurers affiliated with the united kingdom s lloyd s of london insurance marketplace data from the insurance information institute shows lloyd s insurers with 16 8 of the surplus lines market and 13 9 billion in direct premiums following lloyd s surplus lines market share drops down to the single digits for all of the top 25 surplus lines insurers 2examples of other top 25 surplus lines insurers include berkshire hathaway insurance group american international group aig markel corporation group w r berkley insurance group nationwide group fairfax financial usa group chubb ina group and liberty mutual insurance companies 2types of surplus lines insurancesurplus lines insurance can cover many different financial hazards it is often used to cover what conventional insurers consider nonstandard risks for example according to the texas department of insurance a business might need liability coverage for a special event or to move hazardous materials individuals may buy a surplus lines policy if they can t get homeowners insurance from a standard company the department says others buy it to cover very costly items like an expensive art or classic car collection 3in some cases surplus lines insurance can also provide coverage limits beyond what conventional insurers are willing to provide states maintain export lists showing the kinds of insurance that may be unobtainable through regular state licensed insurance companies in their state making surplus lines coverage eligible for sale and purchase there in california for example the list includes among many other things insurance to cover kidnap and ransom amusement parks and carnivals sawmills demolition contractors fireworks displays and hot air balloons 4flood insurance is also on the export list for some states and in certain circumstances in new york for example surplus lines insurers may sell flood insurance if the property isn t eligible for primary coverage by the federal flood insurance program or if the federal program won t provide a sufficient amount of coverage 5surplus lines insurance vs standard insuranceregular insurance carriers also called standard or admitted carriers must follow state regulations concerning how much they can charge and what risks they can and cannot cover surplus lines carriers do not have to follow these regulations which allows them to take on higher risks a surplus lines insurer is sometimes referred to as a non admitted or unlicensed carrier but this does not mean that their policies aren t valid or that they aren t regulated to some extent the designation only means that they are subject to different regulations from those that govern admitted or standard carriers insurers headquartered outside the united states called alien insurers make up much of the surplus lines market who licenses insurance companies insurance companies are licensed by the states as are insurance brokers and insurance agents | |
does the federal government regulate insurance | for the most part no the federal mccarran ferguson act of 1945 delegated that authority to the states exempting insurance companies and the majority of their products from most kinds of federal regulation 6 | |
what is excess and surplus e s lines insurance | excess and surplus e s lines insurance is basically another name for surplus lines insurance that is used by some carriers the bottom lineindividuals and businesses buy surplus lines insurance to protect themselves against financial risks that are too large or too rare for a regular insurance company to be willing to take on unlike most types of insurance surplus lines insurance can be sold by insurers that are not licensed to do business in the buyer s state they are not covered by state guaranty funds in the case of default | |
what is survivorship bias | survivorship bias or survivor bias is the tendency to view the performance of existing stocks or funds in the market as a representative comprehensive sample without regarding those that have gone bust survivorship bias can result in the overestimation of historical performance and general attributes of a fund or market index survivorship bias risk is the chance of an investor making a misguided investment decision based on published investment fund return data understanding survivorship biassurvivorship bias is a natural singularity that makes the existing funds in the investment market more visible and therefore more highly viewed as a representative sample survivorship bias occurs because many funds in the investment market are closed by the investment manager for various reasons leaving existing funds at the forefront of the investing universe funds may close for various reasons numerous market researchers follow and have reported on the effects of fund closings highlighting the occurrence of survivorship bias market researchers regularly follow fund survivorship bias and fund closings to gauge historical trends and add new dynamics to fund performance monitoring numerous studies have been done discussing survivorship bias and its effects for instance morningstar released a research report titled the fall of funds why some funds fail discussing fund closures and their negative consequences for investors fund closingsthere are two main reasons that funds close one the fund may not receive high demand and therefore asset inflows do not warrant keeping the fund open two a fund may be closed by an investment manager due to performance performance closings are typically the most common investors in the fund are immediately impacted by a fund closing companies usually offer two solutions for a fund closing one the fund undergoes full liquidation and the investors shares are sold this causes potential tax reporting consequences for the investor 12 two the fund may choose to merge merged funds are often the best solution for shareholders since they allow for the special transition of shares typically with no tax reporting requirements however the performance of the merged funds is therefore also transitioned and can be a factor in the discussion of survivorship bias morningstar is one investment service provider that regularly discusses and reports on survivorship bias it can be important for investors to be aware of survivorship bias because it may be a factor influencing performance that they are not aware of while merged funds may take into account closed fund performance in most cases funds are closed and their performance is not integrated into future reporting this leads to survivorship bias since investors may believe that currently active funds are a true representative of all efforts to manage toward a specific objective historically thus investors may want to include qualitative fund research on a strategy they are interested in investing in to determine if previous managers have tried and failed in the past funds may close to new investors which is very different than a full fund closing closing to new investors may actually be a sign of the popularity of the fund and attention from investors for above average returns reverse survivorship biasreverse survivorship bias describes a far less common situation where low performers remain in the game while high performers are inadvertently dropped from the running an example of reverse survivorship can be observed in the russell 2000 index that is a subset of the 2000 smallest securities from the russell 3000 3 the loser stocks stay small and stay in the small cap index while the winners leave the index once they become too big and successful | |
what is sustainability | in the broadest sense sustainability refers to the ability to maintain or support a process continuously over time in business and policy contexts sustainability seeks to prevent the depletion of natural or physical resources so that they will remain available for the long term | |
how sustainability works | accordingly sustainable policies emphasize the future effect of any given policy or business practice on humans ecosystems and the wider economy the concept often corresponds to the belief that without major changes to the way the planet is run it will suffer irreparable damage as concerns about anthropogenic climate change biodiversity loss and pollution have become more widespread the world has shifted to embrace sustainable practices and policies primarily through the implementation of sustainable business practices and increased investments in green technology the idea of sustainability is often broken down into three pillars economic environmental and social also known informally as profits planet and people in that breakdown the concept of economic sustainability focuses on conserving the natural resources that provide physical inputs for economic production including both renewable and exhaustible inputs the concept of environmental sustainability adds greater emphasis on the life support systems such as the atmosphere or soil that must be maintained for economic production or human life to even occur in contrast social sustainability focuses on the human effects of economic systems and the category includes attempts to eradicate poverty and hunger as well as to combat inequality in 1983 the united nations created the world commission on environment and development to study the connection between ecological health economic development and social equity the commission then run by former norwegian prime minister gro harlem brundtland published a report in 1987 that has become the standard in defining sustainable development that report describes sustainable development or the blueprint for attaining sustainability as meeting the needs of the present without compromising the ability of future generations to meet their own needs corporate sustainabilityin business contexts sustainability refers to more than just environmentalism harvard business school lists two ways to measure sustainable business practices the effect a business has on the environment and the effect a business has on society with the goal of sustainable practice being to have a positive impact on at least one of those areas corporate sustainability emerged as a component of corporate ethics in response to public concerns of long term damage caused by a focus on short term profits this view of responsibility encourages businesses to balance long term benefits with immediate returns and the goal of pursuing inclusive and environmentally sound objectives this covers a broad array of possible practices cutting emissions lowering energy usage sourcing products from fair trade organizations and ensuring their physical waste is disposed of properly and with a smaller carbon footprint would qualify as moves toward sustainability companies have also set sustainability goals such as a commitment to zero waste packaging by a certain year or to reduce overall emissions by a certain percentage many corporations have made such sustainability promises in recent years for example walmart stores inc wmt has pledged to reach zero emissions by 2040 morgan stanley has pledged net zero financed emissions by 2050 google has pledged to operate carbon free by 2030 the push for sustainability is evident in areas such as energy generation as well where the focus has been on finding new deposits to outpace the drawdown on existing reserves some electricity companies for example now publicly state goals for energy generation from sustainable sources such as wind hydropower and solar because these policies tend to generate public goodwill some companies have been accused of greenwashing the practice of providing a false impression that makes a business seem more environmentally friendly than it is moreover many companies have been criticized for cost cutting measures that make it harder to evaluate their sustainability for example many companies might move some parts of their business to less regulated markets such as by offshoring production to obtain cheaper labor this can make it harder to assess the costs of production on workers and the environment sustainability practices significantly affect the offshoring activities of multinational corporations according to an examination of data from 1 080 multinational corporations challenges surrounding business sustainabilitythe switch to sustainability can be difficult the santa fe institute outlines three major impediments for firms seeking to improve their environmental impacts first it is hard to actually understand the impact of any individual firm second it is difficult to rank the environmental impact of some activities and finally it is difficult to predict how economic agents respond to changing incentives sustainable investing surveys over the past couple of years have suggested that half or in some cases more than half of investors say that sustainability is fundamental to investing strategy not everyone concerned with investments shares the enthusiasm in july 2021 for instance securities and exchange commission sec commissioner hester peirce argued that not only would environmental social and governance esg disclosure mandates violate the agency s authority but it may also undermine financial and economic stability according to peirce the inherently political sustainability metrics were unabashedly created to direct capital toward certain businesses in response to public comments and regulatory pressure to look into such mandates peirce said that it would be a violation of the sec s historically agnostic approach to regulations eiji hirano a former chairman of the board of visitors for japan s government pension investment fund has said that there s a bubble in esg investing and that the fund needs to rethink its esg investments according to interviews with bloomberg news benefits of business sustainabilityin addition to the social benefits of improving the environment and elevating human needs there are also financial benefits for companies that successfully implement sustainability strategies using resources sustainability can improve the long term viability of a business concern just as cutting waste and pollution can also help a company save money for example using more efficient lighting and plumbing fixtures can help a company save on utility bills as well as improve its public image there may also be government tax incentives for companies that adopt certain sustainability practices sustainability can also make a company more attractive to investors a 2019 hec paris research paper showed that shareholders value the ethical dimensions of a firm so much that they are willing to pay 70 more to purchase a share in a firm that gives a dollar or more per share to charities the study also revealed a loss in valuation for firms perceived as exercising a negative social impact based on interviews with senior executives across 43 global investing firms harvard business review has argued that the perception among some business leaders that environmental social and governance issues are not mainstream in the investment community is outdated the sea change in investor attitudes described by harvard business review draws on the increased commitments of investors the principles for responsible investment a united nations supported effort to bring these issues into investing had 63 investment companies with 6 5 trillion in assets under management that committed when it launched in 2006 in 2018 it had 1 715 companies with 81 7 trillion in assets while it s tempting to support companies that seem environmentally friendly some companies are less sustainable than they seem this use of misleading advertisements or branding to create a false impression of sustainability is sometimes called greenwashing creating a sustainable business strategymany corporations are seeking to integrate sustainability practices into their core business models companies can adopt sustainability strategies in the same way that they develop their other strategic plans the first step to integrating sustainability practices is to identify a specific weakness shortcoming for example a company might determine that it generates too much waste or that its hiring practices are causing harm to the surrounding communities next the company should determine its goals and identify the metrics it will use to measure its achievements a company might set an ambitious target for reducing its carbon footprint or set a specific percentage goal for diversity hiring this will allow the company to determine objectively if its goals have been met the final step is to implement the strategy and assess its results this requires continuous re evaluation as a company s goals may change as the company grows there are some common pitfalls for companies aiming for sustainability one of them is the knowledge action gap even though many executives set sustainability as one of their core business values few of them take concrete actions to accomplish sustainability objectives another is known as the compliance competitiveness gap while improving sustainability metrics can make a company more competitive in the market these goals should not be confused with the mandatory compliance requirements that a company must adhere to while sustainability is desirable compliance is mandatory real world examplean interesting example of a successful sustainability strategy is unilever the parent company of dove soaps axe body spray ben jerry s ice cream hellmann s mayonnaise and many other familiar brands in 2010 the company implemented the unilever sustainable living plan a ten year blueprint for reducing the environmental impact of its brands while providing a more fair workplace by the end of unilever sustainable living plan the company was able to announce major achievements in improving its environmental footprint as well as the company s bottom line by working to conserve water and energy the company was able to save more than 1 billion euros between 2008 and 2018 moreover by creating more opportunities for women unilever also become the preferred consumer goods employer for graduate students in 50 countries | |
what are the 3 principles of sustainability | the principles of sustainability refer to the three core concepts of environmental social and economic sustainability sometimes broken down as people planet and profits this means that in order to be considered sustainable a business must be able to conserve natural resources support a healthy community and workforce and earn enough revenue to remain financially viable for the long term | |
what activities promote sustainability | many sustainable businesses seek to reduce their environmental footprint by using renewable energy or by reducing waste companies may also be more sustainable by promoting diversity and fairness in their workforce or enacting policies that benefit the local community | |
what is economic sustainability | economic sustainability refers to a company s ability to continue its operations over a long term horizon in order to be economically sustainable a company must be able to ensure that it will have adequate resources workers and consumers for its products into the distant future | |
what are the most sustainable companies | there are many different ways to measure and compare sustainable companies canadian research firm corporate knights publishes a list of the 100 most sustainable companies the list is topped by the danish companies vestas wind systems and chr hansen holding autodesk inc in the united states schneider electric in france and city developments in singapore | |
what products are not sustainable | non sustainable products uses resources that cannot be replaced or replenished at the same speed that they are consumed products that rely on fossil fuels cannot be sustainable because the resources used to make them can never be replaced other resources such as as rainforest timber fishery stocks sea corals and other wildlife can be sustainable if they are only harvested be limits that allow existing stocks to be replenished the bottom lineas consumers become more environmentally conscious more companies and businesses are finding ways to reduce their impacts upon the planet and their community sustainability practices allow companies to highlight their social benefits while continuing to attract customers | |
what is the sustainable growth rate sgr | the sustainable growth rate sgr is the maximum rate of growth that a company or social enterprise can sustain without having to finance growth with additional equity or debt in other words it is the rate at which the company can grow while using its own internal revenue without borrowing from outside sources the sgr involves maximizing sales and revenue growth without increasing financial leverage achieving the sgr can help a company prevent being overleveraged and avoid financial distress first obtain or calculate the return on equity roe of the company roe measures the profitability of a company by comparing net income to the company s shareholders equity then subtract the company s dividend payout ratio from 1 the dividend payout ratio is the percentage of earnings per share paid to shareholders as dividends finally multiply the difference by the roe of the company paige mclaughlin investopediaunderstanding the sustainable growth rate sgr the sgr of a company can help identify whether it s managing day to day operations properly including paying its bills and getting paid on time the rate is a long term rate and is used to determine what stage a company is in managing accounts payable needs to occur in a timely manner to keep cash flow running smoothly for a company to operate above its sgr it would need to maximize sales efforts and focus on high margin products and services also inventory management is important and management must have an understanding of the ongoing inventory needed to match and sustain the company s sales level sustainable growth rate sgr retention ratio return on equity roe managing the collection of accounts receivable is also critical to maintaining cash flow and profit margins accounts receivable represents money owed by customers to the company the longer it takes a company to collect its receivables contributes to a higher likelihood that it might have cash flow shortfalls and struggle to fund its operations properly as a result the company would need to incur additional debt or equity to make up for this cash flow shortfall companies with low sgr might not be managing their payables and receivables effectively sustaining a high sgr in the long term can prove difficult for most companies as revenue increases a company tends to reach a sales saturation point with its products as a result to maintain the growth rate companies need to expand into new or other products which might have lower profit margins the lower margins could decrease profitability strain financial resources and potentially lead to a need for new financing to sustain growth on the other hand companies that fail to attain their sgr are at risk of stagnation the sgr calculation assumes that a company wants to maintain a target capital structure of debt and equity maintain a static dividend payout ratio and accelerate sales as quickly as the organization allows there are cases when a company s growth becomes greater than what it can self fund in these cases the firm must devise a financial strategy that raises the capital needed to fund its rapid growth the company can issue equity increase financial leverage through debt reduce dividend payouts or increase profit margins by maximizing the efficiency of its revenue all of these factors can increase the company s sgr the sgr of a company can also be used by lenders to determine whether the company is likely to be able to pay back its loans 1sustainable growth rate vs peg ratiothe price earnings to growth peg ratio is a stock s price to earnings p e ratio divided by the growth rate of its earnings for a specified time period the peg ratio is used to determine a stock s value while taking the company s earnings growth into account the peg ratio is said to provide a more complete picture than the p e ratio the sgr involves the growth rate of a company without taking into account the company s stock price while the peg ratio calculates growth as it relates to the stock price as a result the sgr is a metric that evaluates the viability of growth as it relates to its debt and equity the peg ratio is a valuation metric used to determine if the stock price is undervalued or overvalued limitations of using the sgrachieving the sgr is every company s goal but some headwinds can stop a business from growing and achieving its sgr consumer trends and economic conditions can help a business achieve its sustainable growth or cause the firm to miss it completely consumers with less disposable income are traditionally more conservative with spending making them discriminating buyers companies compete for the business of these customers by slashing prices and potentially hindering growth companies also invest money into new product development to try to maintain existing customers and grow market share which can cut into a company s ability to grow and achieve its sgr a company s forecasting and business planning can detract from its ability to achieve sustainable growth in the long term companies sometimes confuse their growth strategy with growth capability and miscalculate their optimal sgr if long term planning is poor a company might achieve high growth in the short term but won t sustain it in the long term in the long term companies need to reinvest in themselves through the purchase of fixed assets which are property plant and equipment pp e as a result the company may need financing to fund its long term growth through investment capital intensive industries like oil and gas need to use a combination of debt and equity financing in order to keep operating since their equipment such as oil drilling machines and oil rigs is so expensive it s important to compare a company s sgr with similar companies in its industry to achieve a fair comparison and meaningful benchmark | |
why is the sustainable growth rate important | the sustainable growth rate is an important measurement because it gives a company an accurate picture of expansion and equity requirements not all companies want to take on additional partners or outside financing so the sgr allows the company to toe the line when it comes to growth using their own revenues and capital | |
how do you calculate the sustainable growth rate | you calculate the sustainable growth rate by taking the company s return on equity times the result of 1 minus the dividend payout ratio another way to calculate it is to multiply the retention rate by the return on equity the retention rate represents the percentage of earnings that the company has not paid out in dividends 1 it is the same formula worded differently | |
how can a company increase growth | a company has many different ways to increase growth a ceo could give a keynote speech that drives customers the company could do a product rollout designed to maximize sales or a company could increase growth by cutting costs such as dividends or unprofitable divisions the bottom linecompanies need to stay on top of their growth rates so the sgr is something that is calculated regularly there may be a point where the rate is sustained at an elevated level but that stretches the company thin and may make it dip too far into its cash reserves at this point companies will typically consider outside financing | |
what is a swap | a swap is a derivative contract through which two parties exchange the cash flows or liabilities from two different financial instruments most swaps involve cash flows based on a notional principal amount related to a loan or bond although the security can be almost anything usually the principal does not change hands each cash flow comprises one leg of the swap one cash flow is generally fixed while the other is variable and based on a benchmark interest rate floating currency exchange rate or index price the most common kind of swap is an interest rate swap swaps do not trade on typical exchanges and generally retail investors do not engage in them rather swaps are transacted over the counter otc or on security based swap execution facilities sefs they occur primarily between businesses or financial institutions 12 | |
what is a swap execution facility sef | a swap execution facility sef is an electronic platform provided by a corporate entity that allows participants to buy and sell swaps in a regulated and transparent manner they are required by law as part of the sweeping wall street reforms stemming from the 2010 dodd frank act understanding swap execution facilitya sef is an electronic platform that matches counterparties in a swaps transaction through a mandate in the dodd frank wall street reform and consumer protection act sefs changed the methods previously used to trade derivatives 3the dodd frank act defined a sef as a facility trading system or platform in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by other participants that are open to multiple participants in the facility or system through any means of interstate commerce 4before dodd frank swaps were traded exclusively in over the counter otc markets with little transparency or oversight the sef allows for transparency and provides a complete record and audit trail of trades 5the securities and exchange commission sec and the commodity futures trading commission cftc regulate sefs 6an exchange for swapsa sef is similar to a formal exchange but is a distributed group of approved trading systems the handling of trades is similar to other exchanges also the dodd frank act states if no sef system is available for specific swaps then the previous otc trading method is acceptable proponents argue that a sef is a swaps exchange much like a stock or futures exchange and they are correct to a degree centralized clearing of swaps and other derivatives reduces counterparty risks and increases trust and integrity in the marketplace also a facility that allows for multiple bids and offers provides liquidity to the swap marketplace this liquidity enables traders to close positions ahead of contract maturity becoming a swap execution facilitymany entities may apply to become a sef to qualify they must meet specific thresholds as defined by the sec cftc and the dodd frank act applicants must register with the sec and meet specific requirements requirements include the platform s ability to display all available bids and offers send trade acknowledgments to all involved parties maintain a record of transactions and provide a request for quote rfq system in addition they must meet certain margin and capital guidelines and the ability to segregate the swap exchange finally the applicant must agree to abide by the 14 sec core principles 789an sef can become dormant if it has not carried out a swap execution in more than 12 months 3 a dormant sef must re register to become active again | |
how does a swap execution facility work | swap execution facilities sefs are electronic matching platforms that bring together buyers and sellers of swaps contracts much like any other electronic exchange these are regulated venues that rely on a request for quote mechanism | |
why were swap execution facilities created | swap execution facilities were created under the 2010 dodd frank act to better regulate and increase transparency for swaps deals both before and after the trade who must register with an sef according to the cftc any person who offers a trading system or platform in which more than one market participant has the ability to execute or trade swaps with more than one other market participant on the system or platform must apply to the commission to register as a sef 3 | |
are swaps required to be transacted through a swap execution facility | while many swaps now must be traded on a sef financial institutions can still transact certain swaps over the counter otc directly between one another but swap trades that are eligible to be cleared must use a sef |
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