Long time back Radhika completed her post graduate diploma. While finishing her post graduate diploma Radhika was offered to take Audit subject. ( Audit is given to those whose percentile is 7.0 and above and is usually taken outside the student’s core subjects) So she decided to take finance as subject.
The small introduction given above is to make you guys understand that Finance is the subject which interests everyone and trust me its not rocket science. Small shopkeeper to big corporate all deal in financial management. The beauty of this subject is that its basic is as simple as your elementary school basics.
Lets evaluate today’s scenario. In today’s scenario corporate deals with very basic question 1) What investment should they make 2) How should they pay back for those investments. The first question involves spending money. The second question involves raising it. Any entrepreneur will emphasize on increasing the valuation of their company. It’s very simple logic “Increase valuation” but not easy to achieve. It is like asking an investor “Buy low, sell high” It is one of the powerful statements and if achieved can make you millionaire or billionaire depending upon the valuation price at buying and selling. But million dollar question is “How to do it”
Investment and Financing decisions are separate. When an investment opportunity or project is identified, the entrepreneur evaluates whether the project is worth more than the capital required to undertake it. If the answer is yes then he or she considers how the project should be financed. But the separation of investment and financing decision doesn’t mean that the financial manager can forget about investors and financial markets when analyzing capital investments project.
So if you are an entrepreneur it is very important for you to analyze the way the capital is raised. If its the 1st level funding then you must check whether the investors and your goal are same or not. When you shake hands with the investor you should also clearly draw the line of involvement. In other words whether the investor would be interfering in day today operation. If answer is yes then they should discuss the area of expertise and decide to work as team. Trust me its great feeling to have investor who can be involved in your day today operation as you get help in the form of mentor or few decisions (which you are not sure of!) You fail together and you pass together.
Usually investors are interested on ROI (return on investment) . While exiting business you can consider following options 1) Preference Share (certain percentage) after x years 2) Preference share with option to redeem at safety net price (Price can decided mutually) or convert the same into equity shares at prevailing value. In other words 1st preference could be IPO, 2nd preference could be secondary sales and 3rd preference could be buy back at net safety price.
Your exit strategy is as important as choosing you business partner. There should always be separation of ownership and management. If you are founder & running company as well then you should forget the tag of founder and work as normal manager. The separation of ownership and management has clear advantages. It allows share ownership to change without interfering with the operation of the business. It allows the firm to hire professional managers. The negative part of it is that it brings problem if managers and owners objectives differ. Dangerous part would be rather than attending to the wishes of shareholder managers may seek leisure or luxurious work. They may shun unpopular decision or they may attempt to build an empire with shareholders money. Hence integrity is always an important criterion of hiring. Become man of value not man of success.
Concluding this write up in 9 financial problems you should never overlook
1) What is Project Risk & what is net present value
2) Incorrect Evaluation of Risk & returns
3) Importance of exception to the efficient market theory
4) How the Net Present Value is calculated
5) Before investing what are the danger points of new securities and new markets
6) How to resolve payout controversy in other words when to distribute dividends
7) Value of Liquidity
8) Wrong merger steps
9) International difference in financial architecture.
Takeaway would be invest sensibly & in planned manner. Stay home, build the future of home managers as foreign investment may involve high risk. Understanding international market takes time & could be highly risky. Always invest in international market through merger or acquisition. Don’t confuse total risk with market risk. Take risk and consider mitigation, after all its your money it’s your bread and butter !
