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Lecture 2

INFO 16029 Lecture Notes - Lecture 2: Tony Soprano, Cash Flow Statement, Cash FlowPremium

13 pages92 viewsFall 2017

Department
Faculty of Applied Science & Technology
Course Code
INFO 16029
Professor
Boom
Lecture
2

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Finance 17-01-23
Notetakers: Andrea & Monique 1
Finance
Monday, January 23, 2017
Review
6 Steps
1. Engagement
2. Gather info thats what we worked on last week and what youre doing
your project on.
3. Clarify you say ) think this is what ) heard before you spend  hours
doing something that they didnt want. You will make this mistake once
and only once if youre an advisor. You dont look professional, plus you
waste time. Everybody when they start out, they miss this step, but its
really important.
4. Identify Priorities You say, (ere is exactly what you need to do to get
here once you know what they want. Those are the strategies that they
need to follow.
5. Implement its not worth anything if they dont actually do something
with it. If someone spends time to go over a plan with you so you can reach
your goals, if you dont do anything with it, its worthless
6. Monitor performance and update - the triangle means change if
necessary. We talked about things that could make a clients plans change,
like job loss, divorce, having kids, tragedy in the family, winning the lottery,
promotion/new job/more money, inheritances, getting married (now there
are two incomes)
Suitability three pronged approach:
1. Know your client
2. Know your product you cant memorize these because there are
thousands and thousands of them. You cant possibly know the details
about all of them. So you will have help in the field when youre doing this.
3. Make them fit thats the suitability
What happens if someone calls and they want to make a trade in their account but
it doesnt suit what they had been talking about? Thats an unsuitable trade. )f a
little old lady who doesnt want to take risk and then she wants to invest in
nothing but medical marijuana companies, does that sound right? )ts a new
industry, so its high-risk. It would seem to me that someone who told me they
dont want to take any risk shouldnt be making that trade, so )d talk to her about
it. Maybe she doesnt know its a higher risk venture. Maybe its such a small
portion of her portfolio, it wont make much of a difference. We dont know until
we talk to her. )f its still unsuitable, at that point, you say no, and youd refer it to
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Finance 17-01-23
Notetakers: Andrea & Monique 2
someone. Otherwise, its your own ass thats on the line. You dont want to do a
trade that is unsuitable for someone.
Leveraging this is borrowing money to invest it. If I put $100 on red, and I win,
my life isnt going to be changed with $. ) could do that same $ and it comes
up black, and I walk away with nothing. I just lost $100. It doesnt change my life.
)ts not nice; ) dont want to lose $, but it wont change your life. So if you do
that same thing, but I also take $1 million from Tony Soprano, and put it all on
black, and it comes up black, I walk away with over $2 million that would change
my life )d pay Tony off, and )d still have $ million left over. )ve taken a big risk
and its paid off. But the other scenario is if it comes up red, and ) had put that all
on black is my life changed? Yes. )d better run really fast. Tony Soprano isnt
going to accept that ) just cant pay him back his $ million. Thats high-risk. )d
probably be in hiding somewhere. That would have a significant change on my life
either way. When I borrowed the money, I had much more risk. )m a lot more
worried about having to tell Tony that I lost his million than the excitement of
possibly winning. )t doesnt mean that borrowing money to invest is always bad,
but ) hope that example helps you remember that its risky.
You all started on your assignment last week, which is really about gathering
information and clarifying. If you have questions, let me know, because I want
everyone to do really well. Thats why we spent so much time on it.
Personal Financial Statements PowerPoint (SLATE)
We started working on some of these for our projects, and were going to get more
detailed on net worth, and you will get a chance to work through.
Personal Cash Flow Statement (slide)
Cash flow is just how much you make and how much you spend. Just because you
make a lot of money doesnt mean you have a good cash flow situation. My biggest
client ever was always one paycheck away from bankruptcy. He made a TON of
money and he spent it faster than he could make it. Were talking about income
and how much money you have left after all the money that has to go out has gone
out. Thats your net cash flow.
contd next slide
There can be all kinds of sources of income. This particular one is after taxes, so
we dont have to worry about having tax here. Typically, people state their income
before taxes come off. In this example, this is how much they make in a month
after taxes are taken off. There can be interest on any deposits, income from
investments: there can be lots of places that income comes from (even a part time
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Finance 17-01-23
Notetakers: Andrea & Monique 3
job in addition to a fulltime job). Then we have expenses. We total up the income
and then see the expenses.
Possible student expenses:
- Insurance
- Parking
- Food
- Rent
- Phone bills
- Transit/commute
- Entertainment
There are lots of different expenses you would have. Whether this is reasonable or
not like what is rent like now? )s $ reasonable for a student?…
S: Not here you cant.
T: IN Vancouver, I had an apartment that was downtown and it overlooked the
mountain and ocean and it was $700 a month.
Then we moved to Toronto and ) had a one bedroom that was half the price on
Scadding, that was 1200$ a month. So it would surprise me if your rent was only
$600. How many of you have a cable bill every month? Only two of us, wow.
So you'd make a list of all the things that need to be paid in a month. Electricity, it
might be a bill that comes ever other month but you still budget for it. Then you
get total expenses and you subtract that from your total income.
Lets say, when someone is working with you and youre going through this, you
notice their recreation is the same amount as their rent. Would you have a
conversation around that? They have a positive cash flow, they have an extra $300
to spend leisurely to invest. It would be reasonable to have a conversation, is it
possible to save more. )ts not a judgment about how people are spending, but
looking for potential to save money. Think about your own spending. Could you
spend a little less on going out? Or drinks? ) dont know one student who could
say no. Hell, I could spend less, have one less bottle of wine. We could all probably
change our spending a bit.
This person is not in a bad position though. So what affects their income? What
affects what you make?
S: jobs
T: yes jobs pay different amounts. What else? The next one affects all of you?
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