Thursday, March 6, 2014

Socmed-ing up until what ? Equilibrium point.

Nowadays, social media has been such an irresistible part of human's life. In this writing, I would live up my old hobby again by correlating the phenomena with stuffs I learned in college. Pardon moi, if it seems like I become somewhat a pretentious female-douche.

The theory of capital structure is probably one of the most interesting and tantalizing theory that I have absorbed during this college times. To make it easy, let me explain it in a down-to-earthy manner. Now, pretend that you own a business. In order to run the business, we have to acquire what it is called assets. Assets will be used for operating and generating revenue for your business. The question is, how would you fund those assets ? The answer is we need capitals. How do we get those capital ?  by foolishly hoping that some crapload amount of money would be coming from the sky ? Na'ah. We, instead, will fund it by two ways, either with Debt or Equity. To put it simple, if you use debt, you kind of borrow each parties' money. If you use equity capital, you will sell some of your ownership and then you'll get the money. Soon after you collect the capital, there you go, you'll be able to operate your business or you even can invest in another project. In the other side, don't forget that the debtholders and equityholders will require some kind of return, but I won't get to that.

The proportion of how much debt-equity we should have on our capital structure is the next interesting question. I don't vividly remember what my textbook explain about all the names of the theory or the mechanism either. But there are some basic rules that I always remember.
- in preferring, between debt and equity, equity comes first
- you can fund all of your assets by relying solely on equity. AFAIR, even one of reputable company in Indonesia whose stocks has always been performing really good, use this method.
- However, if you use only equity capital, you are kind of not be able to reach your potential. You play safe. Risk averse enough ? Your equityholders EPS will be just stable, not that high and not that low. Then, it comes to the debt capital.
- Regardless how horrifying the term "debt" is for common people, it has some advantages. Debt has the "leverage" effect. If you are risk takers enough, take this ? even if you are risk averse kind of person, just let your CFO make the decision, pfft.
- by including debt in your capital structure, let's say it, you'll go the distance. You get more and more money. You can expand your business, you'll get higher and higher profits and at the end your equityholders will receive higher EPS (since they won't share with more equityholders). Seems like the best choice, right ? Unfortunately, no.
- Same as the other choices in life, debt also has its own disadvantage. First of all, the usage of debt will give you and your equityholders more volatile scenario. The usage of debt will benefit you up until the optimal point. Beyond that point, more debt will kill you. I'll give you some visuals.

Now the juicy parts, what is the relation between the usage of social media with those what-the-hell stuffs I have mentioned before ?
Here is my main point, so if you get bored, you can stop reading this after the next sentence. Using social media is like Using Debt.

Your first encounter with social media will get you discover new things, new way to interact with your real life people, even new way to interact with strange people. It is as exciting as the new fiscal period when your business has just chosen to use debt. You can discover and do the calc about each new investing possibilities.

You'll get addicted to social media. I correlate this with the great feeling when you decide to expand more on your business and then soon get the higher revenues.

Up until the point when you get too addicted to social media, it consummates your real life. It keeps you away from the reality. And soon you'll get sick of it. Or maybe some drama will make it worse. In business terms, it is like when you have used excessive level of debt, you have taken too much risk, dear. You have gone beyond your optimal point. Instead of using your resources to operational needs, you use those to pay those financing needs --> to pay the interest expense to the debtholders. Nothing in life comes free. In addition, too much expense will contribute to your lower net income, lower EPS to your equityholders. Not to mention, the risk of bankruptcy. Beware.

But that is the beauty of life, the beauty of applying theory into life, the beauty of decision making, the beauty of finding out what's suitable for you. Are you a risk averse type of person who choose not to use debt ? it's okay, you dont need premiums nor higher EPS to make life merrier, no need to use much of social media. Are you a risk taker who is longing for higher EPS and possibilities to expand more ? then, excessive usage of social media could be a right scheme for you... up until the optimal point, in which you have to give up some things if you choose to go beyond it. Taking part on drama as a witty "cheerleader", sacrificing your productive time for the sake of reading A-Z of a twitwar, being an investigator by hopping from one ig accounts to another. The point is, you can choose.

Disclaimer : this is just a rumbling. This writing is not supported by some statistical evidence. Those analogies I explained above surely is not 100% and does not happen to everyone. This is just a captured phenomena. This is not a conclusion. This is just a phenomena backed up with a theory, which I intend to build a hypothesis from. Cheers !

*damn, my grammar sucks #callingallthenazis*

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