Unconventional Sources of Funds

A topic I've noticed has appeared in a corporate finance as well as financial modeling cases. Whereas people often think of raising funds in traditional methods such as raising debt and equity, I don’t think people pay enough attention to potential changes in free cash flow, particularly change in net working capital.

For instance, in corporate finance, we were discussing the acquisition of a private company and what considerations should be taken into consideration when acquiring the company. Besides the obvious item’s we’d learned so far, it was also useful to see what would happen to the company if it’s operations were structure in a manner similar to its public counterparts. That is to say, express AR as a percentage of total assets (as well as all assets and liabilities) and look at the change in cash flow that results from the aggregate change in each account when bringing the private company to the industry average. The result can provide a considerable cash flow in or out of the company. While this principle can be generally applied, this is easy to understand using working capital as an example. This is because that unlike capex, change in net working capital can possibly supply cash flow into the company if it was previously poorly managed financially or if new management can improve the cash conversion cycle.

In our financial management case example, this principle was more pronounced as the history of a company’s operations for four years worth of balance sheet items was produced. Activity / operating ratios were heavily underperforming, particularly in prepaid expenses (compared against revenue as an appropriate base) as well as accounts payable (days payable).

While an “unconventional” method of financing, this was one of the lessons from Bombril on the Latin America study tour, where Gustavo Ramos, the CEO, a former Rotman Commerce undergrad and Columbia MBA, told us about how he turned the company around when it was in financial distress. One of the methods he used to “finance” the company was to stretch the cash conversion cycle: negotiating with suppliers to get more favourable terms, being more aggressive in collecting on accounts receivable, managing inventory (reducing days on hand) etc.

While strategies such as stretching the payables is considered to be a last resort for companies in “survival mode”, it can also be used to trim a type of operational fat and is directly related to the calculation of excess cash (and also excess working capital) as you structure your balance sheet accounts with optimal weightings.

Any non-income generating assets that can be sold for excess cash without affecting the underlying FCF can create additional value for the company. Clearly, this unlocks value in the company not captured in at DCF, but does not make the DCF any less sustainable (valid).

Rotman International Fair

Yesterday was Rotman's International Fair in the Fleck Atrium. The Global Business Association (GBA) hosted tables with food from around the world and there were table set up with various international opportunities.

I was present at the international study tours table and was happy to answer questions from students about what the study tours were like, how the application process works, etc. I think that with the future growth and development plans of Rotman and the $200 million expansion project of the school, international programs will be at the forefront of further developing the Rotman brand. I believe these programs will be of paramount importance to attracting talented candidates to attend the school from different parts of the world.

It is my hope that students will be interested in applying for these once in a lifetime opportunities to extend their learning beyond the classroom (such as in the Middle East study tour and our trip to the Central Bank of the UAE and asking them about their policies) or how our visit to Embraer on the Latin America tour was directly related to our Global Managerial Perspectives (GMP) final exam of an aircraft manufacturer outsourcing parts and its exposure to foreign currencies etc.

Pop Quiz

What is the value of a zero coupon bond with no maturity?

Back in the Mix

Today marked my first official day back at school with my Corporate Finance class. I've essentially sorted out what project groups I'll be working on this term and have the opportunity to work with people I haven't worked with before (all with reputations for being smart and hardworking). It also occurs to me that there is also a notable bias towards JD/MBA teammates.

The school is abuzz with info sessions and recruiting events every day it seems as my classmates are constantly appearing in business formal wear and putting their best foot forward for potential employeers. People are taking the opportunity to really investigate what career they want to build and what direction they want to take.

There are also first year students who are now in the same place we were last year and some of my classmates have admitted that it is a bit "different" to suddenly be the senior students giving advice on the MBA program to a group of bright motivated students.

2nd Year Case Comp - My Turn

Last year, I went to the 2nd Year Management Consulting Association (MCA) Case Comp as an observer to see the upper year students duke it out. Just like last year, there were a few first year students who came to observe. This year, I put together a team to give it a try. While we didn't place, the experience was well worthwhile. It certainly served as a good primer to get back into "the right frame of mind" for school.

I'm incredibly impressed with the quality of the presentations. One of my buddies came out with a truly unique solution to the problem presented and had an equally incredibly pitch to sell the idea.

One interesting lesson was why companies focus on top line revenue at the expense of bottom line income. While a short term focused company will need to produce results in the form of profits, a firm with a more long term outlook will often focus on top line revenue as a metric reflecting product and volume growth (with operational margins improving over time and producing future profits).

The first place team was a group of part time students, and I'm starting to notice a trend when it comes to part time students and their performance in case comps.

Orientation Camp

Yesterday marked the end of Orientation Camp for the incoming students. Unfortunately, the weather was not ideal, but that didn't dampen their spirits or enthusiasm. During our costume parties, I was glad to see several group costumes as well as some well thought out and executed individual costumes.

Roger Martin also gave a good talk on what makes Rotman different and how integrative thinking is essential from creating good MBA graduates who have something extra. He explained how he envisioned for us to become good users and creators of models and that this will help us in our future careers.

The incoming class was eager and very inquisitive into the nature of the MBA program. They took advantage of the team activities to work with each other and get to know each other before school started. I think we have a great incoming class and I’m looking forward to watching their development over the school year.

It was very obvious from beginning to end how much work the orientation committee had put into organizing the event by the quality of the opportunities for students to interact and the relationships built at this formative stage of the MBA program.

Negotiations

Classes have started a bit early for me as I've started taking negotiations this week (I had repeatedly missed this class for study tours). I've been taking this class since Sunday with the incoming Morning MBA class (apparently this is their first class that they take with FIT).

It's a fantastic class, showing you the mechanics of negotiation with the opportunity to practice your skills with your fellow classmates. A large component is experiential so I don't that it is easy to transpose the nuances onto a blog post. However, I have been told (and can understand why) this class is popular with students.

Most people would probably initially think that a negotiations course will help people "get a bigger slice", but that is too narrow a perspective. It focuses on tactics and strategies for how to enlarge the pie, how to ensure that the counter party feels like they have been dealt with fairly (even deals in which you concede a great deal of value is no guarantee that your counterparty will be entirely happy with the deal and can affect your relationship and future ability to negotiate).