Understanding Business Accounting For Dummies, 2nd Edition (124 page)

Part II of this book shows you how to understand financial reports. In brief, you need a good grip on the purpose, nature, and limitations of each of the three primary financial statements reported by a business:

The profit and loss account:
Many people think that bottom-line profit is cash in the bank, but you know better.

The cash flow statement:
Many people just add back depreciation to net income to determine cash flow from profit, but you know better.

The balance sheet:
Many people think that this financial statement reports the current values for assets, but you know better.

We'll tell you one disadvantage of knowing some accounting: The other members of the board will be very impressed with your accounting knowledge and may want to elect you chairperson.

Chapter 17
:
Ten Places a Business Gets Money From

In This Chapter

Checking out stock markets

Getting private investors on board

Banking on the banks

Financing short- and long-term assets

Looking for government loot

Redeploying pensions

A
ll business ventures need some cash to get going and need more money as they become more successful. They have to invest in staff, equipment, and Web sites, and need to remain competitive and visible by keeping products and services up to date.

Many sources of funds are available to businesses, both big and small. However, not all of them are equally appropriate to all businesses at all times. Different sources of finance carry very different obligations, responsibilities, and opportunities for profitable business. Having some appreciation of these differences enables business people to make informed choices.

Major Stock Markets

A stock market is quite simply a marketplace for trading company stock. A company listing on the London Stock Exchange, The New York Stock Exchange, or FWB Frankfurt Stock Exchange is the way serious players raise money. The new breed of ‘super exchanges' such as NYSE Euronext are also becoming popular. If you want a few hundred million, or a billion or so, stock markets are the places to come to.

All the stock markets have different rules and different outcomes. For example, the value placed on new companies on US stock markets is between 1.5 and 3 times that of UK and European markets.

To get listed on a major stock exchange, a company needs a track record of making substantial profits, with decent seven-figure sums being made in the year you plan to
float
, as this process is known. A large proportion (usually at least 25 per cent) of the company's shares must be put up for sale at the outset. Also, companies are expected to have 100 shareholders now and to demonstrate that 100 more will come on board as a result of the listing.

You can check out all the world stock markets from Amsterdam to Zagreb on the Stock Exchanges World Wide Links Web site at
www.tdd.lt/slnews/Stock_Exchanges/Stock.Exchanges.htm
and at
www.worldwide-tax.com/stockexchanges/worldstockexchanges.asp
. Almost all stock exchange Web sites have pages in English. Look out for a term such as ‘Listing Center', ‘Listing', or ‘Rules' and you'll find the latest criteria for floating a company on that exchange.

Minor Stock Markets

Junior stock markets such as London's Alternative Investment Market (AIM) were formed in the mid- to late 1990's specifically to provide risk capital for new rather than established ventures. These markets have an altogether more relaxed atmosphere than the major exchanges.

These junior markets are an attractive proposition for entrepreneurs seeking equity capital. AIM is particularly attractive to any dynamic company of any size, age, or business sector that has rapid growth in mind. The smallest firm on AIM entered to raise less than £1 million and the largest raised over £500 million.

As with the major stock markets, these junior versions expect something in return. The formalities for floating are minimal but the costs of entry are high, and you must have a nominated adviser such as a major accountancy firm, stockbroker, or banker. The cost of floating on the junior market is around 6.5 per cent of all funds raised, and companies valued at less than £2 million can expect to shell out a quarter of funds raised in costs alone. The market is regulated by the London Stock Exchange. You can find out more by going to their Web site (
www.londonstockexchange.com
) and clicking on ‘AIM'.

AIM is a growing market. The advent of the Sarbanes-Oxley Act and similar regulations is driving companies to hunt out markets such as AIM. Companies are doing this to escape the burden of the very detailed information required on the major stock markets. Additionally, AIM's European competitors, France's
Nouveau Marché
and Germany's
Neuer Markt,
failed and the appetite for lightly regulated stock markets faded in the US with the bursting of the Internet bubble. This left the market wide open. In 2006 AIM raised £15.7 billion - a 76 per cent leap from the previous year - and a record number of companies floated on the exchange, bringing the total to 1,634.

The recently launched OTCQX listing service from Pink Sheets (
www.pinksheets.com
), the NASDAQ Portal (
www.nasdaq.com
), and the new Goldman Sachs (
www2.goldmansachs.com
) exchange (GSTrUE) trading platform are evolving to challenge AIM's success and to provide smaller companies with access to equity capital.

Private Equity

Organisations known as
venture capitalists
provide private equity by investing other people's money, often from pension funds. They are likely to be interested in investing large sums of money, often more than can be raised on AIM. Some 7,000 or so companies worldwide get private equity backing each year, around half of which are in the US where the average deal is $7.8 million.

Venture capitalists generally expect their investment to pay off within seven years, but they are hardened realists. Two in every ten investments they make are total write-offs, and six perform averagely well at best. So, the one star in every ten investments they make has to cover a lot of duds. Venture capitalists have a target rate of return of over 30 per cent, to cover this poor hit rate.

Raising venture capital is an expensive option and deals are slow to arrange. Six months is not unusual, and over a year has been known. Every venture capitalist has a deal done in six weeks in its portfolio, but that truly is the exception rather than the rule.

PricewaterhouseCoopers (
www.pwcmoneytree.com
) produce the Money Tree Report, which is a quarterly study of venture capital investment activity in the United States, and individual country associations do something similar for their own markets. The PSEPS Venture Capital and Private Equity Directory (
www.private-equity.org.uk/associations.cfm
) lists the country venture capital associations.