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Financing Organizations

Financing Organizations. Vysoká škola finanční a správní Winter Semester 201 3 Jaromír R. Stemberg jaromir@mail.vsfs.cz. Course. Eleven lectures + twelve seminars Seven credits Ends with the exam

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Financing Organizations

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  1. Financing Organizations Vysokáškolafinanční a správní Winter Semester 2013 Jaromír R. Stemberg jaromir@mail.vsfs.cz

  2. Course • Eleven lectures + twelve seminars • Seven credits • Ends with the exam • The course explains the nature, advantages, costs and risks of classic and alternative external sources of company financing • It builds on knowledge acquired during previous studies of corporate finance and accounting

  3. Literature • Tichý, Jaromír: Zdroje financování podniku. 1. vyd. Praha: EUPRESS, 2012. 100 s. ISBN978-80-7408-070-8 • Block, Stanley B., Hirt, Geofrfrey A., Bartley B.R.: FoundationsofFinancial Management13th edition, Boston: McGraw-HillIrwin 2009ISBN 978-0-07-128107-2 • Schroeder, R. G.: Financial Accounting Theory And Analysis: Text And CasesHoboken: John Wiley and Sons, 2009

  4. Grading Exam: • Credit by David Muir, M.B.A. required • Pre-term: written test, multiple choice (will be offered only once) Dec. 18th, 2013 2:30 pm • Regular term: oral exam

  5. Course Layout Internal sources of financing, working capital management Reasons for financing by external sources Trade credit Bank loans and other services Financial investments, venture capital, silent partner Strategic investments, mergers and acquisitions Capital markets, stock, bonds, derivatives

  6. Quick Review • Balance sheet, internal and external sources • Working capital management

  7. Balance Sheet AssetsLiabilities Current Assets Current Liabilities Cash and Equivalents Short-Term Accounts Payable Short-Term ReceivablesCurrent Tax Payable Inventory Short-Term Loans and Borrowings Accruals and Other S/T Assets Accruals and Other S/T Liabilities Long-Term AssetsLong-Term Liabilities Intangible Fixed Assets Long-Term Payables • Tangible Fixed AssetsProvisions • Long-Term Receivables • Owners’ Equity Share Capital Share Premium and Capital Funds Retained Earnings Y-T-D Profit (Loss)

  8. Balance Sheet AssetsLiabilities Long-Term AssetsLong-Term Liabilities Intangible Fixed Assets Long-Term Payables • Tangible Fixed AssetsProvisions • Long-Term Receivables • Current Assets Current Liabilities • Cash and Equivalents Short-Term Accounts Payable • Short-Term Receivables Current Tax Payable • Inventory Short-Term Loans and Borrowings • Accruals and Other S/T Assets Accruals and Other S/T LiabilitiesOwners’ Equity • Share Capital • Share Premium and Capital Funds • Retained Earnings • Y-T-D Profit (Loss)

  9. Working Capital Structure • + accounts receivable • + inventories • + cash & equivalents____________________________________________________________________________________________________________________________________________________________________________________________________ • = WORKING CAPITAL • - accounts payable __________________________________________________________________________________________________________________________________________________ • = NET WORKING CAPITAL • - cash & equivalents • __________________________________________________________________________________________________________________________________________________ • = NON-CASH WORKING CAPITAL

  10. Need for Working Capital • WC is tied in the flow cycle • Amount of WC needed can be understood as - average need per period (year, month) - instant need - maximal need during a period (season) • To know the need for WC is essential for planning, securing operational financing, budgeting and capital investment planning

  11. WC Management Goals • Optimize its volume in respect of operational needs • WC management represents individual management of its segments • Zero non-cash working capital • Role of financial manager- WC management is one of the most time-demanding task of the financial manager‘s team- good WC management represents significant savings in financial costs

  12. Production Finished goods Material Accounts receivable 10 days 20 days 10 days 30 days 40 days Accounts payable 30 days Payment to suppliers Payment from customers Need for Working Capital need to finance by working capital

  13. Working Capital Flow Cycle Collection Procurement WORKING CAPITAL Accounts receivable Raw material inventory Production Logistics Sales Warehousing Inventory of finished products

  14. Accounts Receivable Turnover Accounts receivable / avg daily sales (sales / 365) Example:annual sales = 25 000 000 CZKaccounts receivable = 1 800 000 CZK Calculation:average daily sales: 25 000 000 / 365 = 68 493 days of sales outstanding: 1 800 000 / 68 493 = 26 Days of sales outstanding (account receivable turnover) is 26 days

  15. Financing And ItsSources • Why to borrow? • Where to borrow? • How to borrow??

  16. Ownsources Why To Borrow WC need time

  17. Overdraftprotection Fixedloans Why To Borrow WC need Ownsources time

  18. FinancialLeverage 2 firms: exactly the same • Same sector • Same opportunities • Same Management… The only difference:the debt • L (leveraged firm) has 50% of debt • U (unleveraged firm) has no debt

  19. FinancialLeverage

  20. FinancialLeverage

  21. FinancialLeverage For leverage to be profitable, the rate of return on the investment must be higher than the cost of the borrowed money Conclusion Leverage can create value or destroy it To create value, the IRR must be higher than the cost of loan; if not, leverage destroys value.

  22. FinancialMarkets

  23. How to Borrow • Supplierscredit • Bank loans • Financialinvestors • Securities

  24. Bank Loans • Short Term • Long Term • Other Bank Services

  25. Short-Term Loans • Less risk forthe bank hencelessexpensivethan long term loans • Overdraftprotection:used as needed, interest on usedportiononly, “commitment fee“ makesitexpensive • Lombard loan:collateral, fixedamountforfixed period oftime • Revolvingloan:automaticrenewal, behaveslike a long-term loan • Factoring:purchaseofaccountsreceivable

  26. Long-Term Loans • OperationalLoan:financingofassets long-term tiedin operations • InvestmentLoans:projectfinancing, leasing, capitalinvestments • Forfaiting:purchaseof long-term receivables • Mortgage:long-term loantypicallysecured by realestate • Syndicateloan:cooperationof more banks on a giantproject

  27. OtherBankingProducts • Bank guarantee • Letterofcredit • Hedging

  28. Hedging • Vyhodnocení rizika: velikost expozice, senzitivita expozice, stanovení několika scénářů včetně worst-case versus cena za službu hedgingu Výpočet pravděpodobnosti dopadu expozice:

  29. Risk Bank monitors “FiveC“ of a client: Charakter Capital Capacity Conditions Collateral

  30. When to Use What Source Maturity IPO Revenue / Profit Expansion Acquisition Growth Bank loans, Leasing Beginning Time Silent partner,Venture capital, Business Angel Crowd financing

  31. EUROSTAT Statistics (2012) • The most serious problems of business beginning: • Legislation • Customers • Pricing • Qualified personnel • The most serious problems of further business development • Accounts receivable • Payroll cost • Lack of bank financing • Business vs. personal life Business financing is the 3rd largest problem of starting enterprise

  32. Financial Investments • Financial investor, silent partner, business angel • Crowd financing • Venture capital in the Czech Republic • Criteria and investment process

  33. Crowd-Funding Sites • Websites to raise money by selling products not yet fully developed or setting up own fundraising pages • KickStarter, Indiegogo, RocketHub, GoFoundMe, Razoo, Crowdrise and many others • Easy to use, need a good product or idea, presentation (video) • Newestwayofmass business financing • Booming as wespeak • Prepayments increase cash but also liabilities

  34. Financial Investor • Mid-term investment in equity • Mutual funds or single investors • Investments into quick-growing firms with interesting business plan • Suitable for companies with a good potential for growth, interesting product, competitive advantage, market, capable team, and willingness to accept a financial investor as a business partner

  35. Financial Investors‘ Criteria • Complex business plan • Management • Suitableproduct • Quality od revenue • Market • Investmenthorizon • IRR • Exit

  36. InvestmentProcess

  37. ReasonsforNon-Agreement • Differentinvestmenthorizon • Toooptimistic business plan • Companyneedsshort-term financialhelp • Personalrelationshipdoesn‘twork • Owners are not ready to give up 100% ownership

  38. Silent Partner • A person or a company, not disclosed to others • More silentpartnerscaninvest in onecompany • Regulated by theCommercialCode(Citizens‘ Codestarting 2014) • No newsubject • Right to haveaccess to financialstatements and accountingrecords

  39. End ofSilentPartnership • Thecontractceases to existif: • Itexpires • Bothpartiesmutualagreement • Silentpartner‘slossexceedsthefundsput in • Bankruptcyofeither party

  40. Venture Capital • Financingintoequity • High risk hencehigh return expectancy • Often minority partner with veto power • Seeksforattractive business plan and good management • Exit usually in 3-5 years

  41. Business Angel • Sole investor • Usually male 50+ • Reasonably wealthy • Became rich by own entrepreneurship • Hobby business • Invests in something he knows

  42. Business Plan • Reasons • Whattheinvestorsexpect • Business planpreparation

  43. Why Business Plan • To approach a bank or a financial partner- many banks made wrong calls in the past- dot com rush 2004, mortgage rush 2007 • For own use- to understand the goals and the path- see problems and barriers- time set • For employees- they understand the consequences- build team, unify effort

  44. How • Clearconcept, trransparrent • Visual, interesting, captivating • Concrete • Identifiesincomesources in time

  45. GoodImpressions • Scalability • Unique selling points • Trade marks, intellectual property • Working projects, need of capital for expansion • Description – advantage – proof • Barriers of entry • Investment having direct impact on growth and advance • Assertive and capable management

  46. BadImpressions • Too sensitive to criticism • Obsolete business plan • New money to cover old sins • Too high reward for owners • Overstated value of enterprise • Unrealistic forecast (ice-hockey stick graph) • Fog

  47. Versions • Elevatorpitch (1 min) • Executivesummary (1 page) • Abridgedversion (severalpages) • Full version (full lenth)

  48. ElevatorPitch • Oral short presentation of • my idea • how far I am • who is the team • what are the markets • my advantages • how will be financed, how much I need • expected returns and when

  49. Full Business Plan Executive summary:very brief and very concrete Company and teamhow long in existence, key players, CVs, contact Idea / product / servicedescription what, in what sense unique, concrete results Market and competitionSWOT, demonstrated knowledge of market situation, advantages / disadvantages over competition

  50. Full Business Plan Marketing and sellingstrategyplanhow to attacthe market, geography, marketing campagne, timehorizon Finacecurrentsituation, fin. statementsincl. cash flowbudget based on planof sales, capitalinvestmentsneedforinvestments, whatfor, how much, whenexpectedreturns, accented cash flow Conclusionrealistic exit plan, options, summary Appendices

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