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What Does the Circular Flow Model Illustrate

What is circular flow model in economics?
In this article, you will learn all about the model of circular flow and why it is important to the economy.

What Does the Circular Flow Model Illustrate? Circular Flow Model describes the path of money throughout an economy. In today’s society, there is a seemingly non-stop transfer of currency on a daily basis. This covers the path of goods from producers to consumers and households, for the exchange of money.

A thing to note is that the rate at which products flow is never at a stable rate all the time. Over time the rate changes along with the state of the economy. The rate fluctuates with heavy dependence on the state of the economy. When the economy is prosperous and strong, there is likely to be a high rate of flow for goods and services. The opposite occurs during times of economic recession. During these times there is a low rate of flow for goods in order to match the lack of flowing money and resources.

Another thing that occurs when it comes to this model leakage. In this case, the leakages that may occur are taxes that are induced by the government, this drastically alters the amount of currency in circulation for the purchase of products and services. Similarly, money that is paid towards other countries also subdues the path of money in a given economy.

Basics of the Circular Flow Model

This model is comprised of two main aspects, goods and services and factors of production.

What does the circular flow model show

The most common form of circular flow model shows the circular flow of income between the household sector and the business sector.

A market for goods and services

A market for goods and services depends on the fact that consumers from households will purchase finished products from companies. The money will flow from the consumer household to the company in exchange for a finished product.

A market for factors of production

The thing about this model that it is not complete without bringing in the factors that makeup production. Without factoring in these factors to the model then firms should theoretically possess all the currency in the world and households would possess an endless supply of finished products. This is not the case and the things that makeup production must be included. These factors for production are detrimental to goods and services. In the factors market, both households and companies play a vastly different role. The roles almost reverse here as for instance household consumers are the labor force actually producing products. These laborers are then paid a wage by companies in exchange for their hard work in manufacturing finished products. In this case, the consumer households are considered the sellers and companies are the buyers. This is opposite to a market for products and services since in this case, the buyers are the companies, rather than household consumers.

A combination of goods and services

The model of the circular flow does not include the government. This closed-loop leads towards continued economic activity and prosperity. The fact that there is a lack of the government from within the chain results in a simplified circular flow model.

Although the base circular flow model does not include the government, it can, however, be extended for the inclusion of the government. The government can be added between household consumers and companies to impose taxes upon both parties. The government can also induce taxes on the factors of the production market to implement taxes the money that laborers earn.

The assumptions that must be made for this model

A large assumption when it comes to this model is that sectors are composed of a large number of consumers who will purchase finished products to fulfill their necessities and wants. The household consumers in this situation are the ones who have disposable income which society expects to spend money on these goods to satisfy their desires. In some cases, the assumption is made that households spend the entirety of funds on products and services.

Similarly, this model also includes the business sectors. The business sector is comprised of companies that produced products to match the market demand of consumers for certain goods and services.

Finally, the government also plays a critical role. The government has agencies ranging from the state level nationwide. They are responsible for passing legislation which entails the orderly function of the market. They are also responsible for the taxation of generated income.

Now you know exactly what the model of the circular flow is an how it contributes to society.

SOP – Standard Operating Procedures

by Fxigor

SOP meaning – What does SOP mean in business?

SOP or standard operating procedure is written, detailed, step-by-step instructions compiled by an organization to help workers carry out complex routine operations.

As you probably know that SOPs are nothing but some documented processes that are primarily used to deliver consistent quality every time. If you are a product owner or process owner, then it’s important to use SOPs so that your products and services provide quality and consistent value to its customers. When a company is in a growing phase, then the company owner mostly takes all important decisions. But, when the company has already reached its capacity, then the company owner can’t possibly take all the required decisions properly. That’s why the company should prepare documented SOPs so that the company can meticulously establish a proper succession plan and train its employee base accordingly.

Standard operating procedures are important to maintain the efficiency and safety for every department of a company/organization, such as strategic management, human resources, and payroll management, production and operations, employee training, sales and customer service, legal, financial, and information technology, etc.

Additionally note, SOPs should never be documented poorly and they should not be vaguely worded. Rather, the step-by-step instructions of SOPs need to be brief, crisp clear, and easy to understand. Additionally, standard operating procedures should be also simple to follow as well.

The SOP should be the key basis for every employee that’s working in an organization. Plus, standard operating procedures should be also used to training all new employees. On top of that, these instructions need to be updated on a frequent basis so that they are in line with the current needs of a company.

Reveal three key aspects of SOP

Standard operating procedures can possibly increase the value of any company (irrespective of its size and type).SOP follows a process-driven approach instead of a founder driven approach for its target customers.SOPs deliver consistent quality value to its customers.

What do you actually need SOPs or standard operating procedures?

i) SOPs save both money and time: If a company doesn’t follow a streamlined or standard operating procedure, then it will be too difficult to accomplish a specific task. For example, if the same task is getting performed by employees of an organization in many different ways, then it will surely take more time to complete. Thus, it will certainly ensure a time-consuming process. That’s why it’s important to follow SOPs so that the employees can accomplish their tasks in lesser time and money.

ii) SOPs improve communication and process flow: It has found in a recent survey that SOPs can excellently improve communication and process flows of a company and its organizations. Consider a situation, when an organization hires an employee. In that case, the employee must have the right idea about the processes and standards to be followed. That’s why the employees should follow SOPs as defined by the company for improved communications and expedited process flows.

iii) SOPs provide consistency: As already described before, the prime feature of SOPs is that they deliver consistent quality value to its target buyers or customers. Now, when a standard operating procedure is already in place, then the applicable business processes will automatically be followed in a correct and accurate way.

iv) SOPs ensure a safe and efficient work environment: As you probably know that it’s important to maintain a safe and efficient work environment in every organization. Now, when it comes to maintaining a safe and efficient work environment, it’s utmost important to follow the SOPs precisely. Otherwise, if the company doesn’t follow a standardized process, then it will be too chaotic. The assigned job responsibilities of the organization will not be fulfilled correctly. As a result, it will impact the work environment. In turn, the company won’t be able to deliver the right value to its customers in terms of its products and services and this situation can significantly hamper the company’s reputation.

So, being a business owner or company owner, are you planning to create your own standard operating procedure? If yes, then please follow the below sections to learn more about it.

i) Create a detailed list of business processes: First of all, it’s needed to find out and create a detailed list of business processes. This list can be reviewed by the managers; the managers can remove the redundancies and add any new points (if needed). Note, this list will act as the starting point when it comes to creating an SOP.

ii) Plan the right process: Once you have created the list, it’s time to plan for the right process. For example, whether the process will be written in the form of a workflow diagram or a step-by-step guide — this thing needs to be planned beforehand.

iii) Communicate with your employees: In the above steps, you have learned to create a detailed list of business processes and plan the process. Now, it’s time to speak with your employees as they need to understand and follow the process carefully.

iv) Write and review the process: Document the SOP instructions in a simple, clear, and detailed way so that it’s easy to follow by all. Also, you must review it at once.

v) Maintain the process: In order to make the SOP useful and relevant, it should be maintained properly. Additionally, you may need to update it from time-to-time basis so that it meets the current company needs and expectations.

In our trading industry, a lot of prop companies and trading corporate companies have SOP and all those procedures help that traders, analysts, managers work better in the ordered systems.

Pro Forma EBITDA definition

by Fxigor

What is Pro Forma and what is Pro Forma EBITDA

Pro forma is a Latin term that means “for the sake of form” or “as a matter of form.”. Pro forma in business are documents that satisfy minimum requirements. Pro Forma EBITDA is an expected financial statement for a particular period of time that includes certain catalysts and events occurred during that period and used for selling or buying a business is known as Pro Forma. Normally it is used to calculate earnings before interest, taxes, depreciation, and amortization or EBITDA or revenue for a period of 12 months. The entry of a fresh market or the addition of a fresh product during that period is the catalyst on which the buyers focus on calculating the Pro Forma EBITDA TTM and to assume the possible EBITDA during 12 months when a fresh product was launched.

What is Pro forma statements?
Pro forma statements or proforma statements are financial reports for your business based on hypothetical scenarios.

What is the Pro forma income statement?

A Pro forma income statement or proforma income statement is just an income statement under certain assumptions with projections.

What is ProForma EBITDA?

The buyers usually calculate the free flow of cash and the rate if EBITDA or earnings before interest, taxes, depreciation, and amortization while assessing the worth of the business available for sale. For this purpose buyers usually us the projected Pro forma of a growing business to normalize infrequent EBITDA or assessing the effect of the changes occurred during that period.

For instance, if $5.0 million is the TTM EBITDA target of a company but they have introduced a fresh product nearly four months ago which has increased its EBITDA by $200,000 every month. However, due to monthly expenses of $25,000, the company has closed its unit at that location after six months. Then the pro forma TTM EBITDA will be calculated by the buyer at $6.75. In this way, the pro forma EBITDA of the company for sale will include $1.6 million contributed by the new product to the earnings of the previous eight months. It helped the company to save overheads up to $150,000 in six months prior to the closure of the office.

Benefits of analyzing Pro-Forma EBITDA

As discussed above, an investor can get a clear picture of the operations of a company through the figures show in its Pro forma EBITDA. In some cases, they can know about the nature of the business and financial performance of the company concerned more accurately with the help of its pro forma earnings. Pro forma reports are used more in certain companies to show the characteristics of their industry. A significant amount of one-time charges are borne by a company when it undergoes a merger or a considerable restructuring. Such expenses can unfairly affect the short-term profits of that company as they are not considered as ongoing costs. The investor can analyze the pro forma earnings of the company more appropriately while evaluating its long term potentials by excluding the expenses that are non-recurring. Investment banks and corporate managers also prepare and use pro forma financial statements to evaluate the future operating costs of their businesses as well as to help in evaluating their potential for the targeted takeovers.

In this way, pro forma EBITDA is a useful tool that can be used to analyze the changes in the operations of a company and identify the drivers of its core value. The information provided by the pro forma earnings can help in clarifying the things when a large amount of goodwill and asset depreciation is blurring the official earnings of a company.

Unicorn Startup Definition

by Fxigor

Unicorn company definition
Unicorn is a privately held startup company valued at over one billion dollars.
Terms as “unicorn in business” or “Unicorn startup ” refer to companies that are classified as a startup that is under private holding and has obtained a valuation of a level that is equivalent to or higher than one billion dollars. This term was first developed in the year of 2013 by Aileen Lee who is a world-renowned venture capitalist. She had decided that the term unicorn was the perfect choice to represent these types of startup ventures that were highly successful due to the fact that the unicorn is known as being a rare species.

Aileen Lee

At the time that the famous Aileen Lee proceeded to use the term unicorn for these startup companies, it was realized that only thirty-nine such companies could be classified as unicorns. Other research indicated that startups that had commenced from the years of 2012 to 2015 were experiencing growth in terms of their valuations at a rate that was two times faster in comparison to businesses that had been started from the years of 2000 to 2013.

Number

Once the year of 2018 arrived, sixteen companies within the nation of the United States of America had gained the classification of unicorn status. This, therefore, resulted in the presence of one hundred and nineteen companies that were privately owned with a valuation of one billion dollars or more on a global scale. This was impressive indeed.

Grow fast strategies

It appears that venture capital agencies and investors are prone to adopt grow fast strategies when it comes to implementing startups at this present time. This strategy applies the effort of startups expanding quickly via enormous supplies of funding and lowering prices in order to achieve a large portion of the market share, along with beating off the competition as quickly as possible. The exponential returns that come in rather fast from such a strategy tend to be overtly pleasing to all stakeholders. On the other side of the spectrum, it cannot be denied that there is the cautionary element of the possibility of foregoing sustainability in the creation of value for a long period of time, which can happen to online companies by times.

Buyouts

A large number of unicorns were formulated when there were buyouts performed through large companies that had been publicly held. It is the tendency of companies that have an environment of slow growth and interest rates that are low to place their concentration on acquisitions rather than the development of projects for internal investment opportunities or capital expenditures. There are some larger companies that prefer to pep up their companies by engaging in the purchasing of other business and technology models that are already established instead of engaging in the creation of these entities by their own efforts.

Private and public holding

Before a technology company transfers to being held by the public, it is usually under private holding for approximately eleven years in comparison to four years as was the trend in the year of 1999. The stemming of the dynamic shift is related to the increase in the amount of capital at the private level that can be attained by unicorns. In addition, another contributing factor is based on the implementation of The US Jumpstart Our Business Startups Act, which was orientated in the year of 2012. This act allowed the augmentation of the number of shareholders that a company could possess by as much as four times prior to the need of the company to provide disclosure of its financial records to the public. It is, thus, indicated that there was a three-fold increase in the amount of private capital that was placed in investment purposes in relation to software businesses during the year of 2013 to 2015.

Access to more rounds of funding

Because of the implementation of several rounds of funding, there is no need for businesses to engage in the initial public offering, which is abbreviated as IPO, in order to have access to capital or to achieve a valuation a higher level. The companies can simply resort to relying on their investors for increases in more capital. There is also the risk that IPOs may cause a devaluation for the business when the public has the perception that the company has a valuation lower than what investors believe the valuation of the company is. When the public market is not in agreement with the valuation of a company, it can then engage in decreasing the price for each stock pertaining to the initial range of the IPO.

Avoiding hassles

Furthermore, startups and investors do not have a strong desire to address the hassles that are associated with going public due to the increase of many regulations when doing so. Take into consideration for example regulations such as the Sarbanes-Oxley Act. Such regulations have applied elements that are much more stringent after the resurgence of many cases of bankruptcy within the US market. As a result, many private companies wish to avert such regulations.

Being savvy

Startups further are engaging in being savvy to take advantage of the influx of new technology within the past ten years in order to quickly achieve unicorn status. With the eruption of social media and the fact that millions of people engage in the usage of such technology to access massive global markets, startups are able to form the expansion of their companies much more rapidly than in former times. With this being the case, it cannot be denied that unicorns have experienced much growth due to innovations pertaining to P2P platforms, mobile smartphones, social media applications, and cloud computing.

Deriving valuations

In terms of valuations that allow startups to achieve unicorn status, such valuations are considered to be unique in comparison to companies that have been established for a longer period of time. Hence, the valuation of a company that has been established for quite a while is based on the premise of the performance of the companies over the past years. On the other hand, the valuation of a company that is a startup is based on the potential opportunities for growth and the long-term development that is anticipated.

Advantages of Foreign Exchange

by Fxigor

All You Need to Know About the Advantages of Forex Trading

If you are an experienced trader then, Forex trading is the one for you. It is an option that is available in the world market for you. It is highly lucrative and you can have many benefits in the everyday life of it. But believe me, you can have all the benefits of Forex trading if only and only if you are experienced in it. Otherwise, it might not be your choice of work. But having learned the little nuances of it, you can reap some profits.

Let us discuss here some of the benefits of Forex trading here.

1. Working Hours – The first best thing about this trading is that you can work at any time of the day. It is an option that is available 24 hours a day. You can take a weekend break as well, as the market is closed for the weekend days. The working time of the market is from 5 pm on Sundays EST. The trading begins in the US and ends when the major trading market is closed by Friday 5 PM EST.

Why is this excellent?

Why are the working hour’s advantages of forex trading? If you trade, for example, US stocks, and you live in Asia for example, or in a different time zone, you need to wake up at early in the morning to trade. If you trade Japanese stocks and live in the USA you need to be wake up the whole night etc. You get the point.
So as a forex trader, you can trade EU sessions if you live in Europe, US session if you live in the USA or Asia session if you are in Asia.

2. Liquidity – Liquidity is the major benefit of Forex Trading as this is like the capacity of an asset to be able to convert into cash. So when it is said that your trade has high liquidity then it means that you can make huge amounts of cash or you can have large amounts to trade with that particular day. This also will be within the small spreads.

If you are a big trader and you want to buy some stock for 1 million dollars you can not do that for each stock every time.
In the forex market, you have huge liquidity and your trade will be executed in seconds.

I remember when I bought the first stock in my country. I waited 6 days to buy and 28 days to sell. The market didn’t have liquidity.

3. Transaction Costs – These spreads are an important term in trading as it the difference between the bid amount that you might fix and the amount that the potential selling people might actually offer. This spread will actually be the payment for the people who are involved in this trading. So, the transaction costs generally are not very high.

If I buy 1 lot in forex EURUSD. And the spread is 0.8 pips. BUY 1.3, stop loss 1.29 and target 1.31.
My profit will be 100 pips, and it is $1000. My transaction costs are $8.

4. Be in Control – You can actually see that the brokers who are into these Forex trading usually let the sellers and buyers in the market and use a fair amount of leverage. This is the one that gives them the ability to trade with elevated amounts than what they actually possess in their accounts. So, this leverage is the one that actually allows you to control trade with a lesser capital than what you actually have.

5. Get Benefited From Rising and Falling Prices – Another advantage of involving yourself in Forex Trading is that you can get benefited when the prices are rising or falling. Both these factors can be suitable for you depending on how you use these. I suppose that you see a currency pair that is going to boost in price then you can buy it or vice-versa. These are the benefits over the stock market and Forex Trading.

Where do I see the importance of forex trading from Rising and Falling Prices?
For example, the stock market can go up 10 years and then start going down. A lot of automated systems are bad in falling markets, a lot of quants overfit systems and in a falling market, they are not so good.

In forex trading, systems are always good and tested at rising and falling trends.

Again, here is a gentle reminder, this Forex Trading is not for the inexperienced traders. You might not profit the same as what others are doing in the same field.

What does the circular flow model show

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