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Starting from this lesson, we will enter the second unit to discuss financing and management issues.

You may feel a little strange, why do you want to talk about two seemingly different issues, financing and management, in one module?

That's because these two questions are essentially related to finding money. Only financing is for enterprises to find money from the outside, and management is for enterprises to find money from the inside by reducing costs and increasing efficiency.

In this lesson, let's talk about finding money from outside.

There are two main financing methods for enterprises. One is debt financing, such as bank loans, and the other is equity financing, that is, finding investors.

These two financing methods, in financial statements, correspond to the creditor's rights and equity on the right side of the balance sheet.

Why do enterprises need financing?

Generally speaking, it is to invest in a new project. For example, Disney needs more than 30 billion yuan to build a new theme amusement park in Beijing. Such a large amount of funds generally requires external financing.

What issues does Disney need to consider? First of all, should the 30 billion be financed by debt or equity? In financial management, this is called "capital structure" problem.

Secondly, if you use debt financing, such as bank loans, should you use short-term loans or long-term loans?

You may say, these two questions are easy to answer, which one is cheaper.

You're absolutely right. Using as cheap money as possible is indeed an important principle of financing decision. In financial terms, it is to keep the cost of capital as low as possible, so as to increase economic profits as much as possible.

But if you ask a financial expert, he will say that cheap money is very important, but it is not the most important principle of financing decision.

The "matching" here has two meanings: one is the matching in time, and the other is the matching in risk.

Let's talk about the matching of these two dimensions respectively.

First, term matching.

You know, assets-heavy projects usually involve bank loans. Generally speaking, the interest rate of short-term debt is lower than that of long-term debt, because the loan time is short and the risk that banks have to bear is relatively small. In other words, short-term loans are cheaper than long-term loans.

So from the perspective of capital cost, it seems that all enterprises should use short-term loans.

But is this the reality?

According to statistics, more than 60% of listed companies in China have long-term debts.

Knowing that short-term loans are cheap, why do enterprises choose long-term loans?

The reason is that the term of short-term debt and long-term investment projects does not match.

What are the characteristics of cash flow in long-term projects like Disney? That is, the previous years belong to the investment period, and the cash flow is usually negative. Only when the project runs normally in the later period will it begin to generate more positive cash flow.

According to the experience of Shanghai Disneyland amusement park, it takes about 1 1 year from construction and opening to cost recovery. If Disney uses short-term debt of 1-2 years to save some interest expenses, then Disney must pay off the debt within two years, and the cash flow of the amusement park may still be negative or very small within two years. The project itself simply cannot support the interest and principal of the loan.

The practice of using short-term debts for long-term projects is called "short-term loans and long-term investments" in financial management.

Many enterprises use short-term loans for long-term projects because short-term loans are low in cost and easy to borrow. But short-term loans and long-term investments are very dangerous financial operations. You must remember.

It's like you borrowed 5000 yuan from an internet platform at the beginning of the month and bought a new mobile phone. You have to pay back the money in Qian Yue, but you won't get paid until the end of the month. What if the loan is not paid by the middle of the month?

You might say, then try to borrow another sum of money, pay off the old debt of 5000 yuan with the newly borrowed money, and pay off the new loan when you pay your salary at the end of the month.

You're right. Many companies are really using this method of "borrowing the new and returning the old", especially those with strong financing ability and good bank relations.

Once a company has tasted the sweetness, other companies will follow suit, leading to the continuous spread of short-term loans and long-term investments.

Some domestic scholars have studied the A-share listed companies in 2008-20 15, and found that on average, 32.9% companies have this kind of "short loan and long investment" behavior every year.

What are the risks of "short-term loans and long-term investments"?

When the macro economy is good, the risks are invisible, but when the economy is depressed and banks tighten monetary policy, the risks and hidden dangers are exposed.

In the past two years, small loan companies and P2P internet finance have often broken out, and the fuse is mostly the redemption crisis caused by "short loan and long investment".

Let's not talk about whether the funds raised by these enterprises are really invested in real and reliable projects, but most of their investment projects are relatively medium and long-term, and they can only return their capital in two or three years to seven or eight years, and the funds raised by these institutions are short-term funds, even paid on a daily basis every week. In this financial game, as long as the financing growth rate stagnates, there will be a redemption crisis immediately.

This is why in the eyes of financial experts, the primary concern of financing decisions is not whether the funds are cheap enough, but the risks behind the funds. The financial risks brought by "short-term loans and long-term investments" are far greater than the benefits brought by using short-term loans and saving financial expenses.

Second, risk matching.

After talking about the time matching between financing and investment, let's talk about the risk matching between them.

Risk matching, mainly consider choosing creditor's rights or equity?

Generally speaking, debt financing can be considered more for projects with low risk and guaranteed profits, while high-risk projects usually rely on equity financing without guaranteed profits.

Because investors are more risk-tolerant than creditors.

Creditors are concerned about the lower limit of the project income, that is, whether the project can pay off the principal and interest. Paid off, it doesn't matter how much money the project earns.

Shareholders are more concerned about the upper limit of future earnings, that is, how much money they can earn at most.

A startup is a typical example. You must have heard the saying that 99% of entrepreneurial projects will fail. Banks are certainly reluctant to lend money to such projects.

Therefore, startups can only rely mainly on equity financing to develop. So you see, there are a number of institutions that invest in startups, called private equity investment institutions, also known as "venture capital" institutions. They don't have to pay back the money when investing in startups. If we fail, we will lose everything. But once this company becomes the next unicorn, they will enjoy the greatest benefits.

The time matching problem we just mentioned actually exists between venture capital institutions and start-ups.

We should know that entrepreneurs and companies are bound for a long time, and venture capital institutions usually sell their shares and quit the company two years after the startup goes public.

In other words, venture capital institutions are short-term shareholders of start-ups.

What problems will this term mismatch cause?

That is to say, the positions of venture capital institutions and founders are not exactly the same. People will have different opinions when making decisions.

For example, we talked about R&D investment in the first lecture.

Considering the long-term development of the enterprise, the founder will definitely be willing to invest in research and development. But what about venture capital institutions? Because accountants still regard R&D investment as expenses at present, which will reduce the current profits, they are unwilling, because the more R&D investment, the farther the corporate profits will be from the listing requirements of the CSRC.

In fact, this short-sightedness of private equity institutions is unfavorable to the long-term development of entrepreneurial enterprises.

My research team and I have studied the capital market performance of start-ups after listing. We divide the listed companies in China into two categories: those with private equity participation before listing and those without private equity participation before listing.

You can see a comparison result through the following figure.

On this graph, the abscissa shows 1 month, and after 3 to 48 months, the company's stock market performance in 2008. Vertical excess rate of return refers to how much higher the rate of return of a stock is than that of the broader market.

From this picture, you will find that the stock price performance of enterprises supported by private equity institutions is worse than that of enterprises without private equity institutions after listing.

You see, the mismatch between the financing method and the project time will directly affect the growth of a company. But in recent years, with the overall maturity of the private equity industry, the problem of time mismatch has gradually slowed down.

Course summary

Financial experts look at financing methods from three aspects:

First, the first principle of financing decision-making is the matching of financing methods and investment projects. Matching includes two dimensions: duration and risk.

Second, the financing strategy of "short loan and long investment" can save financial expenses, but it will greatly increase the risk of enterprises.

Third, shareholders are more able to bear risks than creditors. For low-risk projects with guaranteed profits, debt financing can be considered more. Without profit guarantee, high-risk projects usually rely on equity financing.

Thinking after class

As we said before, there is also a maturity mismatch between investors and entrepreneurs, which leads to some short-sighted behaviors, such as insufficient investment in long-term research and development. In fact, listed companies also have such troubles, because investors in the capital market care about short-term gains, which has caused great short-term performance pressure on enterprises. Some time ago, Elon Musk, the founder of Tesla, announced that he didn't want to be bothered by this incident and wanted to quit the market. Do you think this is a wise choice for Tesla?

? If Tesla chooses to withdraw from the market, it will face two situations. The advantage is that enterprises are no longer restricted by capital in production and R&D, and creditors of private equity funds will limit their investment in R&D. Without capital restrictions, companies will concentrate more on developing products. However, the disadvantage is that the financing scale of the company will be affected to some extent, thus affecting the company's investment in R&D and other business activities.

? But considering the long-term development of enterprises, I think delisting will be a wise choice.