Chapter 19 deals with Financial Management by a company (and in the
background, each of us with our own finances). How does this "average
company get money to operate? Does it borrow directly from a bank, venture
capitalists, or issue bonds? This is essentially a company asking you and me to
loan it money at a certain interest rate. And all returns being contingent on it
making any kind of profit. Like us, it helps if the company has a budget
and is able to stick by it over the fiscal year. Money needs to be readily
available for short term payments like salaries and benefits, as well as long
term capital expenditures, like new machinery or office computers. Those who loan
money always ask themselves how risky is this venture? Will I get anything back
on this loan or will I lose it all?
And money can be owed to a solvent company by
it's customers, but the company might need it right away so must turn to
specialized organizations like Factors. These Factoring organizations buy the
Accounts Receivable from a company for a percentage of the total money owed
them. Let's say a customer owes a company $1,000.00 over a period of months, but
the company needs cash today. They sell the account to a Factor who pays them
$800.00 right now. The Factor then waits to collect the entire amount over the
billing period to make a nice profit of 20%. Not a
bad return for waiting it out! Some profits are even higher depending on the
risk involved in waiting. Kind like the situation some desperate people get into
when they take a prized ring to a pawn shop. The shop usually gives them a
fraction of the cash it's really worth, puts it in the window and generally
sells it higher than the cash amount given to the owner. (Now, if it doesn't sell
right away and the owner can find the cash somehow they might come back to
reclaim it!) I guess the moral for an individual or a company is never get too
desperate or needy for cash!
Chapter 20 discusses ways companies can get large
amounts of money in typical ways: going to investment bankers, venture
capitalists, selling stocks or bonds. Stocks being actual shares, or "pieces
of the pie" ownership of the company. While bonds are simply loans of money
to a company with it's promise to pay it all back. Kind of a sophisticated
version of promissory notes, which are really big corporate IOU's that you and I
might write out for a friend when they loan us a $20. Each of these methods of
getting cash, or in risking one's cash involve various degrees of risk taking on
the part of either party. Actually all of the stock market trading and financial
markets of corporate loans is about risk. When so many articles appeared
recently complaining about the stock market "betraying us", my first
thought was " Get over it" ! The stock market always
has been a kind of sophisticated gambling. Granted, a cut above spinning the dice in Las
Vegas, but none the less very similar. It's only within the investing lifetime
of so many young people that an expectation emerged that the good times were how
it "should be". Not true, as many discovered. The key to safety is a
balanced portfolio based on your risk tolerance, stage of life, other resources,
and anticipated cash outflows. In a word, Diversification. Anyone interested in
extra credit could rent the video and critique "Wall Street" starring
Michael Douglas as the infamous trader Gordon Gekko who personifies the darker
side of the stock market.