Understanding The Residual Income Formula

In the past article in this series, a definition of residual income as well as ideas for residual income was outlined. A strong background in the understanding of these concepts is recommended in order to appreciate the background of residual income formula as well as its application in corporate world.

Recently, analyst has adopted the concept of passive income formula in valuation of a firm due to its ability to adjust for time value of money. Naturally, money losses value with time, thus a thousand dollars today may not be worth the same amount five years from now.

As a result, households prefer consumption today as opposed to future and this is the basic reason for using the concept of passive income in evaluating best alternative in investment opportunities.

The residual income formula is a concept in managerial accounting which is used to determine and compare the performance of different units in a business. This formula measures the success of the each department against the minimum required rate of return.

The rate of return on investment is a requirement in determining the viability of a business venture. In simple terms, before investing your money in an idea, it is important to determine if the expected return is worth the risk.

The residual income formula is attributed to Economist Alfred Marshall who is the founder of many economic models and principles. Leading motor vehicle assembly firm General motors' was the first company to adopt the concept in valuation of its business units. The basic formula is:

RI = Operating income - (Operating Assets x Target Required rate of return)

In this formula, operating income refers to the net operating income - net operating expenses. Operating expenses are incurred to ensure smooth running of the business and they include costs such as wages, rent, and cost of raw material among others.

Required rate of return is the opportunity cost that the business incurs as a result of foregone alternatives. It is key to note that a business operates on scarce resources in terms of money, time and employees.

It is thus important to make a choice regarding the best alternatives to allocate resources to. The alternatives foregone by the company as a result of scarcity of resources is the opportunity cost or the minimum required rate of return.

The operating assets of the business unit on the other hand refers to the asset base of the particular department or the total assets in a specific business unit.

In this regard, a company earns higher passive income when per unit cost of producing a good is lower than the revenue obtained from selling the unit. In simpler terms, to ensure higher income earnings, the company should operate at a point where the revenue is maximized while the costs are minimized.

In this case, the difference between income and expenditure is a big positive figure illustrating growth in income for the firm. In evaluating projects to invest in, a business unit that has a positive passive income figure is a viable idea while that with a negative value should be abandoned.

If two similar projects both have positive values, then the one with the highest figure should be selected since it will generate more income for the company.

It is important to make a distinction between firm passive income and household passive income or in simple terms the residual income for a business entity and that of an individual.

The above formula is used in determination of passive income for a business unit. In terms of individual households, the definition of residual income formula changes to reflect the unique behavior of household consumption.

It is defined as money left over after paying utility bills and loans or in simple terms what is left after paying debts. In this regard, the residual income formula becomes:

Residual Income = Monthly Net Income - Monthly Debts

In this formula, the monthly net income is the sum of all passive income earned which can be from royalties, rental income, interest earning on saving, subscription or service fee for a service rendered.

Monthly debts on the other hand relates to expenses incurred in earning the monthly income and could include expenses like agency fee to real estate agency.

So how do you ensure income growth basing on this concept?.

The trick is to ensure a big difference between monthly income and debts. Try to increase your income as much as possible but limit your spending as low as possible as well as limiting borrowing.

The bigger the difference between these two the higher the passive income and in contrast as the difference decreases, the residual income decreases as well

The information used in calculating passive income is available in the income statement of a company. The popularity of using the residual income formula in estimating the performance of different departments in a business is due to the simplicity and the realistic nature of this technique.

For instance, if two departments generate same level of profits but one department requires more assets in its operation, then the best alternative for the company is the one which uses less assets. This is because the extra assets will be an additional expense to the company thus reducing profitability.

In the next article, the concept of residual income is used in determining the viability of different residual income ideas. Having an idea on how to make passive income is not enough, before investing your time and money in such an idea ensure it is a worthy investment by determine how viable it is.

Amaiwe Bryan is a professional Internet marketer and an article writer.

The Secret to Creating Wealth With Shares

The secret to understand shares correctly

When you purchase shares in a business, you become one of the owners of that business. A shareholder means: a joint owner. For example, if a business is divided into one million shares and you purchase one share, then you will own one millionth of that business. As long as the business continues to operate, you will own one millionth of the annual profits, which the business generates. If the business can consistently make more profits each year, your portion of those profits will obviously also increase year after year.

You should see yourself as a "partner" in a business that's managed by other professional people. Although you are one of the owners of the business, you never have to do any work in the business, as the employees of the business do all the work and, obviously receive a good salary in return. After these salaries and other business expenses are paid, you and all of the other owners, i. e. shareholders, will exclusively share in the business's remaining annual profits.

What happens to this profit every year?

Two things. A portion of the money is invested back into the business every year, so the business can expand and grow. New equipment is bought, retail space is expanded, new projects are embarked on, etc. The rest of the money is paid out to you and the other investors.

These payouts are known as dividends. If the business expands successfully, you will receive a larger dividend payout the following year. . . an even larger payout the year after that. . . etc. In this way, you will receive a growing stream of passive income from the business without having to personally do any work in the business.

How to create wealth with shares?

To create great wealth with shares, you need to invest in good businesses and give these businesses enough time to grow. As the businesses grow, the value of your shares will also increase. In the meantime, you will receive a stream of dividends that increase annually

Therefore, the most important secret for successful share investments is to understand that you become a joint owner of a business. If the business grows, the business's assets and profits will increase and this is how your shares increase in value. If you purchase shares in excellent businesses and you are patient, it is guaranteed, so to speak, that you will become extremely wealthy over time.

Obviously, the big secret is to uncover excellent businesses. There are many businesses on the New York Stock Exchange that you can buy shares in, but only a few of them are truly excellent businesses.

The Secret behind Million Dollar Blueprint products online

Potential investors aren't aware of the share investment information I explained above. They are lured to million dollar blueprint products available online. These self claimed investment experts sell what they call million dollar blueprint platforms. They claim that they have come up with million dollar secret tool, tool to make instant wealth in the stock market.

So, be warned, don't purchase any million dollar blueprint. Search for reputable stock broking companies, preferably offline or email the Stock Exchange directly or make a telephone call and get advice.

Martin is premium member at Wealthy Affiliate online marketing training. At WA beginners, experienced internet marketers alike, are trained the fundamentals of online marketing industry.Wealthy Affiliate goals are to train members to build successful online business of any magnitude.

4 Cool Tricks to Maximize Your Credit Card

Your credit card is an important tool when it comes to your finances. This is precisely the reason why you should try your best to make the most of its perks. You may not realize it, but there are a number of things that you can do to maximize your card's use.

This article presents a couple of cool tips every cardholder needs to remember.

Make best use of your Billing Cycle

The way you pay your monthly bills is crucial to maximizing your card. For instance, if you settle your dues punctually and in full, then you will be able to avoid being charged with interest. This is probably the best way to use your card. This is because you are technically getting a free loan from your card provider.

Of course, there are still a couple of tricks you can do to step things up. Consider this: if you make a charge a day before your statement is closed, then that you will have around 20-25 days to settle that charge. However, making that same charge a day after the statement is closed will give you a total of at least 55 days to pay that charge. This is because that charge will be transferred to the next billing cycle.

Another important trick you need to remember is that some card providers actually allow their users to move back their due dates, thus extending their payment cycles. This can certainly help if you find yourself in a financial jam. However, you need to keep in mind that you won't be able to this repeatedly.

Always ask to be reconsidered

If your initial credit card application was rejected, you should never hesitate to ask for reconsideration. There is always the possibility that your credit worthiness was not assessed correctly. Keep in mind that the process itself is not perfect, so mistakes are bound to happen.

Just give your card provider a quick call. Explain to them why you deserve to be approved for that particular card. If you are convincing enough, the person on the other end of the line might just give you that card you want.

Threaten a Chargeback

Asking for your money back from a merchant is often a futile effort. Fortunately, credit card users have a slight edge over people who pay with cash. As a credit cardholder, you are entitled to a chargeback option.

The chargeback option is an important trick all card owners need to remember. All you have to do is call the merchant, and ask to speak to a supervisor. Inform them that you want your money back. However, if your initial attempts at a refund are rejected, then tell them that you intend to ask for a chargeback from your card provider.

It is virtually guaranteed that the supervisor will change their mind once you threaten them with this. This is because a chargeback means increased merchant fees. They would rather give you back your money than be charged any additional fees.

Make the Most out your Reward Cards

As you may have already noticed, many reward cards rely on gimmicks to make you spend more. Do not fall for this trap. Overspending is the among worst things you can do with your credit card. Instead, you should try using these cards creatively. Earn reward points the smart way.

For instance, if you want to qualify for a sign up bonus, then try using your credit card to purchase gift cards. Just make sure that you will be using these in the future. That beings said, buy them from retailers that you visit often.