Innovative Financing - Book Report/Review Example

 Finance involves cash inflows and cash outflows. The paper focuses on the different finance-generating sources. The paper delves on the factors leading to favorable approval of finance applications. Priority venture capital preferences are based on net profit outputs. Angel risk (venture capital) financing source. The source represents the rich person’s cash and other assets that are placed into the business entity (Schiller 25). The rich individual may be a creditor. The creditor loans money to the business in exchange for interest payments. The individual may also be an investor (Mycapital 1). The investor is part owner of the company. The same investor owns stocks of the company. The popular stocks are common stock and preferred stock. As the name suggests, the preferred stock offers priority dividend payments to its owners compared to the common stock owners. Seed Capital risk (venture capital) finance source. This is financing source during the first stage of the entity’s business life cycle (Schiller 25). The amounts invested are typically the smallest, compared to the other financing sources during the other business cycles. Few investors are interested to invest during the seed capital activities because the business has not yet opened up. There is higher fear that the future business operation may not be profitable compared to investing in a business entity that is currently profitably operating for the past three years. Seed capital is normally used to fund the research for possible new profit-generating sample products. The fund is normally used for conducting feasibility researches and other administrative (management) expenses (Mycapital 1). Public –Private partnership financing source. This is the financing source where the government partakes (Heinemann 2). In terms of amount, the amount invested in the public-private partnership is typically larger than the amount invested during the seed or early stage risk (venture) capital financing activity. The government (public) enters into partnership with private companies. The partnership ensures faster and better attainment of the government’s public service goals and objectives. For example, the government may enter into a build operate and transfer partnership with a private contractor. The private entity will build railroads and trains. Both the government and the private entity benefit from the same partnership (Engel et al. 1). For example, Public-Private partnerships were able to save the government huge infrastructure funds. The partnership’s 2005 four-year Chicago Skyway project reduced the government’s operating costs by eleven percent. The project generated allowable labor wage savings. By replacing the $20 per hour workers with $12 per hour workers, the government saved $8 per hour on labor wages. Next, Indiana Governor M. Daniels’ cash-strapped government entered into a public private partnership. The private company funneled $ 4 billion into the project. The same project included the private company’s operating, repairing, and upgrading the Indiana Toll Road. Project improved transportation comfort for the Indiana travelers at lesser government expenses. Other projects include the Northwest Parkway project, Pocahontas Parkway, Las Vegas monorail, and the Port of Miami Tunnel project (Engel et al. 1). Expansion stage risk (venture capital) financing source. This is the financing source during the fourth stage of the entity’s business cycle (Cf-sn 1). The financing source focuses on generating funds for the expansion of the business (Mycapital 1). Expansion includes setting a new branch within the city or another state. Expansion funds may come from different sources. One of the sources is the bank loan. Another source is merger. A merger occurs when two companies combine and one of the two companies is retained as the combined businesses’ company name. Another source is consolidation. Consolidation occurs when a new company name crops up after the two companies are combined. Further, expansion may also include entering a new business market segment (Cf-sn 1). For example, a grocery store entity may decide to allocate the vacant grocery section to cater to the grocery store’s hungry clients. The grocery store may set up a fast food outlet within its premises. Hungry grocery store customers can patronize the food products of the grocery’s fast food section. Late Stage Risk (venture) Capital financing source. This is financing source during the last stage of the entity’s business life cycle (Mycapital 1). During this business entity stage, the company is in full swing. The entity’s prior years’ operations show the business is generating a yearly net profit trend. Financing is used to increase its marketing efforts and revenues. Marketing efforts include hiring more marketing personnel needed to promote a higher demand for the company’s current and future products and services. Funds at this business cycle stage can also be used to increase the entity’s current production outputs or services. Additional production equipments will increase the factory outlets’ product outputs. The amount is favorably 71 percent higher than the seed and investments Venture fund size. During 2013, the National Venture Capital Assoc. entity affirmed several investors deposited invested in seed entity and early stage business entity companies. The amounts invested in both entity types reached $11 billion. The amount is 17 percent higher than the prior 2012 year’s seed and early stage business entity investments (SSTI 1). During 2013, there were 3,995 financing infused into U.S. seed entity and early stage entity organizations within 2013 alone. The 2013 deals reached $29,365 million. In terms of details, Alaska state and Wyoming state involved zero seed and early stage entity financing activities. California State generated the highest seed and early stage entity financing, $ 14,670 million. Massachusetts State generated the second highest seed and early stage entity financing, $ 3,059 million. Further, the 2012 year showed a different picture (SSTI 1). The 2012 deals amounted to the unfavorably lower $27,323 million. In terms of details, Alaska State, Wyoming State and South Dakota State involved zero seed and early stage entity financing activities. California State generated the highest seed and early stage entity financing, $ 14,534 million. Massachusetts State generated the second highest seed and early stage entity financing, $ 3,210 million. Typical No. of Investments during one year. There are typical investment transactions during one year. In terms of seed and early stage financing source, the U.S. typical (average) investment activities from 2008 to 2013 involved an average of 3,784 transactions per year (SSTI 1). In terms of industry investments from 2008 to 2013, the typical or average number of risk (venture) capital financing reached in one year is 1,409 deals (Price Waterhouse/National Venture Capital Association 1). The per U.S. industry investment outputs is lower than the number of venture capital financing’s seed and early stage financing deals (PriceWaterhouse 1). Further, the reason is that one U.S. industry company may have two or more seed and early stage financing source transactions (SSTI 1). For example, one media industry sector company may seek venture capital financing sources for its seed financing activities. Next the same particular media industry company may seek venture capital financing sources for its startup financing activities. Third, the same particular media industry company may seek expansion venture capital financing sources. The amount collected from the financing source can be used to hire more marketing staff to sell the grocery store’s products and services. Finally, the same media industry company may seek late state financing. The financing amount may be used to set up a new branch in another state. Furthermore, some states show the highest typical or average venture capital investments in one year (PriceWaterhouse 1). In terms of number of deals during one year, the highest average (typical) number of deals occurred within the software market segment risk (venture) capital financing activities, 429 deals. This figure represents 35 percent of the average number of total U.S. deals from 2008 to 2013. The total venture (risk) capital financing source deals within the U.S.’s average 1,216 deals within the 2013 accounting period. Next, the second highest typical or average (typical) number of deals occurred within the media and entertainment market segment (venture) capital financing activities, 164 deals. The figure represents 14 percent of the average number of total U.S. deals from 2008 to 2013. Third, the third highest typical or average (typical) number of deals cropped up within the Biotechnology industry market segment, 98 deals. The figure represents a smaller 9 percent of the average number of total U.S. deals from 2008 to 2013. Lastly, the fourth highest typical or average (typical) number of risk (venture) capital deals cropped up within the IT industry market segment, 98 deals. The figure represents a similarly smaller 9 percent of the average number of total U.S. deals from 2008 to 2013. Sizes & Types of invested companies There are different sizes and types of venture capital investment companies (PriceWaterhouse 1). During 2013, Total U.S. venture capital investment reached $ 5019 million. The software industry companies generated a 48 percent venture capital investment, the highest business type in terms of size. Next, the Biotechnology companies generated a 14 percent financing investment size, compared to the total U.S. venture capital financing investment, $704 million. Third, the media and entertainment industry companies generated the 3rd highest U.S. venture capital financing size, $ 426 million. Fourth, the IT services industry companies generated the 4th highest U. S. venture capital financing size, $351 million. In terms of number of deals, the U.S. generated 1,397 venture capital financing deals during 2013 alone (PriceWaterhouse 1). The software industry companies generated the highest number of deals (size), 631 deals or 45 percent of the total U.S. venture capital deals. Next, the media and entertainment industry companies generated the second highest number of deals (size), 186 deals or 13 percent of the total U.S. venture capital deals. Third, the IT industry companies generated the 3rd highest number of deals (size), 124 deals or 9 percent of the total U.S. venture capital deals. Fourth, the Biotechnology industry companies generated the 4th highest number of deals (size), 105 deals or 8 percent of the total U.S. venture capital deals. Lastly, the consumer products industry companies generated the 5th highest number of deals (size), 76 deals or 5 percent of the total U.S. venture capital deals for 2013. Major factors in the evaluation of potential (possible) investments There are several factors needed for an enhanced risk (venture) capital financing decision. First, risk (venture) capital should be prioritized for companies that are scalable (global devincubator 4). A scalable company is one that can easily generate revenues. Likewise, the scalable company is able to lower the expenses and costs below the total revenue amount. For example, the feasibility study shows that the company will be able to generate $150,000 average net incomes from 2015 to 2017. Next, the transaction will generate a favorably higher $250,000 average net income from 2018 to 2021. The projected net incomes shows that it is profitably viable to grant risk (venture) financing to the start-up company. Second, the company must be attractive to the target investors or creditors. If there is news that oil may be found in the newly established company’s land, many interested investors and creditors will eagerly invest one or loan money in the new company’s oil exploration business practices. As investors, the individual becomes part owner of the company (Bragg 110). As creditors, the creditors earn very high interest payments from lending money to the venture (risk) capital company (Sayer 75). When the prospective investor observes that some competitors’ food stores are filled with people during lunch time, the prospective investor will be very interested to invest in the newly formed fast food company. Further, the attractive exit strategies will persuade the creditors to funnel funds into the company’s coffers (Schiller 25). The recipient company will classify the funds are classified as loan payable. For example, the high and fast fluctuations in the stock market will persuade some people to gamble their excess funds in the stock market. The fast stock market price fluctuation will persuade the investors to sell their stocks at a selling price that is higher than the price I paid for the purchase of acquisition of the risk (venture) capital funds. In addition, the excellent management of the company’s scarce resources will persuade the people to lend money to the company (Salvi 167). Excellent management includes ensuring avoidable losses, costs, and expenses are reduced to allowable levels. Excellent management entails successful increasing the company’s revenues, gross profit, and net profit. The revenue increases and reduction of avoidable expenses and costs will favorably increase the prior accounting period’s net profit figures. Further, another factor is the demand for the store’s products and services (Bodea 8). If there is no viable demand for the store’s products and services, the company may not be able to generate high revenues. In the same manner, the unfavorably low revenues may not be enough to pay for the company’s daily operating expenses, bringing the risk-laden company into the brink of bankruptcy. A feasibility study will affirm whether there is a high profitable demand for the company’s products or services. The feasibility study will affirm that the investment will generate high revenues, high gross profit figures, and high net profit amounts. The company’s financial statements will affirm whether the prior year’s marketing activities generated a net profit picture? In addition, another related factor is whether the company is a “gainer” in the stock market (Bodea 8). A gainer is a company where its stock market selling price increases, higher than the prior stock market selling prices. On the other hand, a loser is a company having a stock market selling price that is lower than the prior stock market selling price. Lastly, the profitability factor determines whether company is a good risk (venture) capital decision (Hawawini 144). If the financial statement indicated the company generated net losses for the past two years, there is a probability that the company will continue to generate net losses in the next few years, possibly forcing the company to close shop. However, a financial statement indicating that the company generated 25 percent net profit ratio for the past three years will persuade creditors and investors to channel some of their hard earned money to the profitable business entity. The creditors are assured they will be paid by the borrowing business entity on time. The investors are assured that they will be able to generate returns on their investments. Different methodologies to determine the firms’ values There are several methods in determining the value of the firm (Hawawini 144). The asset approach method focuses on determining the amount of assets and liabilities needed to attain the firm’s goals and objectives (Cf-sn 1). Lack of funds may prevent the establishment the proposed entity or continuance of the current entity’s projects. Normally, cash-strapped individuals and entities prefer low investment firms compared to the huge investment alternative companies. More assets equates to higher firm value. Next, the market approach is a good method. Under the method, individuals and entities prefer investing in companies selling very saleable products and services (Cf-sn 1). Selling products that have minimal demand may generate net losses. Net losses may force the company to close shop. Lastly, the income approach is another good method. The individuals and entities prefer to place their money and other assets in income-generating projects (Cf-sn 1). A company that generated net profits for the past three years is a favorable risk (venture) capital choice. Companies that generated net losses for the past two years should be avoided, a favorable risk (venture) capital choice. Under the return on investment concept, only companies generating net profits can spawn returns on the investments of investors or completely ensure full payment of creditors’ loan amounts. Proposal length, structure, & details needed of entrepreneurs when seeking financing The proposal length depends on several factors (Keith 1). Normally, the standard size is from 15 pages to 20 pages. One factor is the number of sections. Normally, more sections enumerated in the proposal require more pages. Compared with a concise or summary-based proposal, a more detailed proposal will entail preparation of more pages. In addition, the type of business will affect the proposal length. A more complex business, such as restaurant business, will entail longer pages compared to proposal to engage in a merchandising business or bookstore business. The restaurant plan contains the ingredients of each menu as well as the different menu choices. Engaging in a new unfamiliar business requires more detailed explanations, more pages, compared to engaging in a business proposal to buy and sell cars. Likewise, the seed or startup proposal entails lesser pages compared to a merger between two corporations or a multi-thousand dollar expansion to another state or country because the seed or startup company usually needs lesser finance amounts compared to the multi-thousand expansion proposal. Lastly, the amount of investment affects the business proposal length. A bigger finance amount will entail more detailed explanations, more pages, compared to a small start up or seed finance amount. The detailed explanation on how the finance amount will be used to generate revenues, return on investment, and explanation of how the proposed marketing strategies will ensure faster recuperation of the finance amounts. Further, the proposal structure has several formats. One format includes several sections. The first section is the executive summary (M 1). The second section is the business description. The third section is the marketing strategies. The fourth section is the market segment competition analysis. The fifth section is the design and development plan analysis. The sixth section is the operations and management plan. The seventh section is the financial report section. In addition, the proposal details describe the above sections. The first section, executive summary, summarizes the important points of all the other sections. The business section describes the main purpose of the business, its officers, location of the business, and other pertinent business descriptions. The marketing strategies section includes how the company is planning to sell its many products and services. The competitive section explains the relationship of the competitors in relation to the business entity, especially the market share. The design and development plan section shows how the design as well as the development of the company’s current and future products. The operations and management plan contains the company policies on how the business is operated, including the organizational chart. The chart shows the line and staff officers and subordinates. The financial section contains the projected balance sheet, income statement and possible statement of cash flows. Financing types (typical) provided There are three major financing types (Hofstrand 1). The first type is investment. Investors become owners of the company when they infuse funds into the entity. The second type is debt. The entity borrows funds from creditors. The creditors expect to earn interest amounts from the borrowing entity. The third type is donation. The balance sheet financial report of each entity indicates the total amount of debt (total liabilities) and the shareholders equity (which includes the investors’ infused amounts). All other finance sources fall under one of the above three finance types. Percentage of who gets financing (firms) The basis for determining whether the firm has a high probability of getting financing is the projected income statement (Robinson 437). The projected income statement takes into consideration the projected revenues. The company’s marketing strategies contribute to the generation of the projected revenues. The company’s revenues contribute to generation of gross profit figures. Next, deducting the cost of the products sold form the net revenues results to the gross profit. After deducting the total operating expenses, the net profit or loss is arrived at. If the operating expenses are exceed the gross profit, net loss output occurs. Consequently, finance companies, creditors, and investors shy away from companies that generate net loss outputs. On the other hand, finance companies, creditors, and investors normally prefer companies that generate net profit outputs (Robinson 437). This is very understandable. A company that generates net profits will be able to pay the creditors on time. In the same manner, the investors will receive returns on their investments from companies that are able to generate net profits. Table 1 Feasibility Study             Feasibility Study         Projected 2015 Probability     Company Net Income (Net Loss) US $       A 250,000 Approve     B 100,000 Approve     C 80,000 Approve     D 25,000 Approve     E 5,000 Approve     F (30,000) Disapprove     G (7,000) Disapprove     H (68,000) Disapprove             Based on the above table, the not all of the firms will receive the approval of the creditors, finance companies, and investors, all other factors on equal level. It is clear that Company A to Company E will surely receive the approval of the finance companies, creditors, and investors (5/8= 62.5 percent). On the other hand, Company F to Company H will not receive the approval of the finance companies, creditors or debtors because these companies will not have enough funds to pay the creditors and generate returns on the investors’ infused funds (3/8= 37.5 percent). Conclusion Based on the above discussion, finance is grounded on cash inflows and cash outflows. There are different finance sources and types. Profitable risk ventures ensure the payment of all loan amounts. Several factors indicate profitable businesses encourage finance companies, creditors, and investors to infuse funds into the business entities. Evidently, the finance companies, individuals, and entities prefer net profit-generating companies. Works Cited Bodea, Tudor. Segmentation, Revenue Management and Pricing Analytics. New York: Routledge Press, 2014. Bragg, Steven. Business Ratios and Formulas. New York: J. Wiley & Sons Press, 2012. Cf-sn. Business Expansion. 2013. 19 February 2015 . Engel et al. hamiltonproject.org/. Februrary 2011. 19 February 2015 >. Global devincubator.org. Innovative Financing. September 2014. 19 February 2015 . Hamilton. Private-Public Partnership to Revamp U.S. Infrastructure. Retrieved Feb 18, 2015 from Hawawini, Gabriel. Finance for Executives. New York: Cengage Learning Press, 2010. Heinemann, Er. Public-Private Partnerships. New York: Butterworth Heinemann Press, 2011. Hofstrand, Don. Types and Sources of Financing for Startup Businesses. 11 March 2014. 19 February 2015 . Keith, M. Financial Planning Business Plan. 24 July 2014. 19 February 2015 . Mycapital. Venture Capital. 6 October 2013. 19 February 2015 . PriceWaterhouse. PriceWaterhouse Money Tree. 2014. 18 February 2015 . Robinson, Thomas. International Financial Statement Analysis. New York: J.Wiley & Sons Press, 2015. Salvi, Antonio. Wiley Desktop Editions. New York: J. Wiley & Sons Press, 2011. Sayer, Stuart. Issues of Finance. New York: J. Wiley & Sons Press, 2011. Schiller, Robert. Finance and the Good Society. New York: University Press, 2012. SSTI. Useful Stats: U.S. Seed and Early Stage Venture. 6 February 2014. 18 February 2015 . Read More