Chapter
3: Financial and investor objectives and targets
The financial objectives of organisations are based on investment principles. This applies whether the investor is a government, NGO, university, scientific foundation as well s applying to banks and shareholders. The words “investor and investment” should be seen in this light.
Investors will put their money into those areas where they can earn the maximum return. The first investments usually offer the highest return. Thus higher returns are potentially easier to obtain in young economies.
Investors will take risks in order to earn higher returns. If the investor can earn a high return without taking large risks e.g. on government bonds or lending to a bank, the investor will either not take risks, or demand higher returns to take account of the risk. The higher the risk the higher will be the return sought by investors. The concept of risk is linked to the time factor. The risk is reduced if it is possible to sell an investment quickly. Similarly the return will usually be higher if profits are earned quickly. Neither applies to most book publishing organisations. The key issues are summarised below:
State enterprises and NGO’s will not operate only to financial criteria. While wishing to make effective use of funds, the major aims may be intangible: education, guaranteeing textbook supply, making affordable textbooks for students; enhancing the reputation of an industry of institution.
Return on investment (ROI) is the “profit” expressed as cash that is earned on an investment in a period of time, usually a year. If US$ 1,000 is invested on day 1, and the investment is sold after exactly one year for US $ 1,100, the return on investment is exactly 10%. If a dividend of US $50 is received after 6 months and the investment is sold for US $ 1.050 after exactly one year, the return is slightly higher than 10% (10.25% because the dividend of US$ 50 is received earlier). For companies the term “Return on Equity ROE)” is perhaps widely used. EXAMPLE
Compound interest in the method used to calculate the returns. In the example the amounts invested, as are follows:
Year 1 US$ 1000 It is assumed that profits or interest are reinvested.
Thanks to computers such calculations are now both fast and easy. All popular spreadsheets e.g. Excel, Lotus 123 have functions for these calculations. The calculations are known as “Net Present Value” and “Internal Rate of Return”. Both methods use cash rather than accounting profits in their calculations. These concepts will be used later in the book. A sample spread-sheet model is included in Appendix 1d.
The real return for investors will take into account inflation. If an investor seeks a real return of 8 percent pa and the rate of inflation is 10 percent, then a return of 18.8 percent is required.
Investors are attracted to fast
profits. They are more attracted to the sale of needs e.g. food, clothes
which can be sold for cash through retail shops. Thus investors in young
economies do not find book publishing an obvious investment opportunity.
Newspaper publishing has a daily or weekly cash cycle, magazines a weekly
or monthly cash cycle. Within book publishing only educational publishing
with its guaranteed market, and book distribution are likely to appeal
to investors. Other issues relevant to investors are the low “ perceived
value” of books, the large number of titles and the fact that publishers,
while creative, are viewed by banks as poor managers and entrepreneurs. Return on Investment applied to non-profit-making organisations
In NGO’s and ministries the return may not be exclusively financial. The benefit may “intan-gible” e.g. the guaranteed supply of textbooks for primary or university education. The return on investment is similar to the rate of interest earned on a bank deposit although the percentage demanded will be higher because of risk. The investor, perhaps the Ministry of Education, will demand value for money under pressure from the Ministry of Finance. Thus while the NGO may not be judged in terms of the Return that it makes, the concept of Return on Investment is relevant for decision-making e.g. in pricing books and assessing their profitability, in assessing the terms of trade with distributors and printers.
One application is where ministries, rather than offering grants upfront of a new project, or advance payments under a contractual order, now pay by results on completion. Many publishers assume that overspends can be funded by the state “customer” With book packagers and publishers of foreign language coeditions in developed countries stage payments are frequently used. This is partly because the books are being created for a single customer who might otherwise cancel the contract too easily.
EXAMPLE In many young economies printers demand that textbook orders be supplied to them by November for delivery to schools in the following August. Often they will demand payment in advance for paper. Some textbooks may be delivered to schools in May of the following year, 4 months before the textbooks are required. If textbooks are in short supply and parents pay for the textbooks, then parents may perhaps be prepared to pay in June. However the books are not required until August ahead of the re-start of the school year in September. In developed countries orders with printers would be placed much later thus allowing more accurate data on the number of school children. Printers, competing to obtain the orders would invoice on completion in June or July and offer credit to publishers of 60 – 90 days. If we apply this to young economies: printers would demand payment in September or October for textbooks already delivered. Money could be collected from the pupils (or the state education budget) and used to pay the printers invoices. In many countries voucher schemes operate which act as proof of delivery by the schools or the pupils. The state then releases money against the vouchers received. This is “payment by results”. In many young economies this is achieved by confrontation e.g. by publishers printing overseas, rather than through co-operation and negotiation.
The cash cycle is the period of time between the initial investment and the profit being realised as cash. The concept can also be applied to book publishing decisions e.g. the period of time taken from the first expense on a book, such as the author payment, to the collection of the final payment from the customers for the sale of all the copies. It is also called the “cash conversion cycle” and the “Working Capital cycle”. The concept of working capital, the money used in making and marketing the books, is vital to book publishing or to any industry, and is the subject of a later chapter. The two concepts namely return on investment and the cash cycle can be linked in the assessment of title profitability and will be discussed in detail under the chapter of Title Investment Decision and Pricing Methods. These two concepts can also be used for other major issues including the following:
The share value of a company does not rise and fall only in line with profits and the percentage return on investment. It will also rise because the stock market has greater confidence in the company. A share may rise because of the following:
The concept applies in part to non-profit-making organisations and to private companies not quoted on a stock exchange .e g. increased market confidence will attract new authors, suppliers, anxious to benefit from the company’s growth will quote more competitive prices and credit terms; banks will be more prepared to lend on favourable terms; experienced publishing staff will be attracted to the company.
The last key investment concept is liquidity, which is the ability of an investor to carry on. If the investor has insufficient cash from which to live on a day to day basis (or to exploit another investment opportunity) then the investor is forced to sell part of their investment portfolio. A shares or bonds may have to be sold at a loss because the investor needs cash. In the case of shares and bonds, a dividend or coupon is paid in cash at regular intervals.
Companies have to pay bills to staff and suppliers. If they cannot, and the shareholders or banks will not inject further funds, the courts may wind up the company. NGO’s have to reduce the scale of their operations, sell off stock, apply to banks for more funds, and subject to their legal status, may have to cease operations.
Investment theory:
Publishing companies must:
With minor difference these concepts apply both to state owned publishers, NGO’s as well as independent publishers.
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