2.1 Raising Finance in 15 minutes! (Edexcel A Level Business Recap) #Finance

hello welcome to 2.1 this is the first in five a series of five CashNews.cos on theme two this first one is all about raising Finance so we’ve got internal and external

href="https://cashnews.co/finance" style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance liability and then business planning these are gen these are supposed to be kind of Recaps of these of these themes obviously it goes without saying in the space of 15 20 minutes you

can’t recap in full depth an entire unit and so that’s not what these are aim to be they’re supposed to be kind of used for revision used for Recaps of of the kind of the general gist and obviously then you would supplement this with your own your own study in the description of

this CashNews.co there will be a bunch of links to some resources that are going to be able to help you including links to the other themes versions of these CashNews.cos as well so let’s get started 2.1.1 and 2.1.2 are very closely linked of course internal and external

href="https://cashnews.co/finance" style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance they’re all about the sources of Finance available to a business I

actually teach these together so if we start with our internal Finance our internal none;">Finance is the Finance that comes from within the business and there are a couple of sources that businesses will use when uh when gaining kind of internal

href="https://cashnews.co/finance" style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance the first of which is and and probably the most important for a small business is the owner’s own funds so quite often with a small business the owner’s gonna have to put in

some money of their own and in fact a lot of a lot of new businesses that are that start from the ground up are funded this way the key obviously with this is it doesn’t have to be paid back although the owner is likely to want to take some money out of the business as well it’s

probably going to be how they make their money but there’s no interest of course there’s no there’s no sort of formal repayment schedule obviously the downside here is you are limited in terms of how much money the owner has and so there could be a limit in that sense it might not

be enough to start a business but that’s the first one that’s the main one and that’s going to be the case for any kind of small business they’re going to have to use some of this at least return Profit is the is the next one this is only going to be

possible for a business that actually makes a Profit and this is basically just our previous Profits that have been reinvested into the company and the idea is behind this I mean this is technically the owner’s own money because any Profit

the business makes belongs to the owners so if they make the decision to reinvest it then it is technically the owner’s own funds but instead of it coming from their own pocket it’s coming from the money that the business is generated the obvious benefit with this again is it

doesn’t have to be repaid but the ideal is would would be that it kind of generates more money in the future so you might reinvest your retained Profit now knowing that you’ll be able to get more back potentially in the future the third is to sell an asset and

there’s issues with this one because if you sell an asset if that asset was something that you need or that you use or as part of your production then you are in some respects limiting your Max Capacity but if you’ve got something that you own a business has got something they own that

they’re maybe not getting full use out of they might decide to sell that asset in order to put the funds towards something else alternatively if a business is doing quite poorly or has a Cash Flow problem they might sell something that they own but maybe they need because

then the need for cash immediately is is a more kind of important important factor so for example if you have a vehicle you might sell the vehicle to raise some much needed cash and then if you caught if you still need a vehicle you could potentially rent or lease a vehicle instead and so yeah that

sale of Assets is is something that you would only ideally do if it’s something you don’t need anymore but could be a really useful one in case of in case of emergency so those are the internal sources of color: #1a73e8; text-decoration: none;">Finance when it comes to external there’s a few different things to think about here first of all it’s Finance that

comes outside the business I think that’s probably quite self-explanatory but the first thing is we’ve got to understand the sources of this external Finance before we look at the

methods of external Finance so there’s a variety of different sources that you can get your external text-decoration: none;">Finance from you’ve got Banks of course family and friends peer-to-peer lending other businesses crowdfunding so raising a raising money from donations from a wide range of people quite often using websites like Kickstarter um that might involve some sort of

they’ll pledge obviously a little bit of money to you you might have to provide some sort of reward for them in return for that and then business angels as well so investors who are interested in kind of helping invest in businesses and and helping them grow and from these sources you can get

a variety of different methods of Finance and so there’s Loan Capital so for example a bank Loan where you borrow a

sum of money and then repay it over an agreed schedule the obvious benefit is you can gain access to a huge amount of money potentially depending on what it is you need it for and depending on whether the bank believes that you’re trustworthy of paying it back but you will have to pay it back

and you will have to pay it back with interest Interest Rates are covered in 2.5 when we look at the economy so in the 2.5 CashNews.co if you’re not sure what interest is you’ll catch up on that there there are also Overdrafts and an

Overdraft is a form of Loan Capital but it’s a really short-term source of Finance you don’t want to use this in the long term

an Overdraft is where you are able to temporarily go into a negative bank balance and so you might have a bank account that has an Overdraft facility for example a thousand pounds what that allows you to do is spend up to minus a thousand pounds and you might have

charges if you go into that Overdraft you might have you have certainly repayment deadlines you have to pay off a certain amount per month but if you’re in a bit of a bind in a short-term situation you could use your Overdraft to gain access to some cash but

the key thing is you want to make sure you pay this back pretty quickly because Overdraft have usually quite High Interest Rates and sometimes carry charges as well and will affect your Credit rating so Loan

Capital there’s two options there one’s a bit more sort of medium to long term the other one’s very much a short-term solution we have share Capital selling a share of the business so you would sell potentially a percentage of the ownership of the

business in exchange for investment the benefit of this is you don’t have to repay it back in terms of a regular scheduled repayment the new investors the new shareholders would get a percentage of the Dividends that get percent of the Profits back instead

and that would be their justification of course they could also the later date sell their share and maybe make a Profit on that as well venture Capital similar to share Capital but this one is a little bit more risk reward based so an investor a

venture Capitalist is is one who sees potential for Profit within an organization however it might be quite high risk compared to maybe just buying into a friend and Family’s business and so they will invest with the intention of making a

Profit and maybe that’s going to be a short term situation maybe that could be six months maybe that could be a year we’ve got leasing which is where we rent something instead of buying it I mentioned leasing briefly when I said about the sale of Assets

if we sold an asset but we still needed to use that asset or a similar asset we could potentially lease it and the idea is rather than one lump sum of a big cash outflow it’s kind of a source of violence because they’re sort of although you never see the money they’re lending you

the money you owe them over the next however long it is two three years it could be potentially longer we also have Trade Credit trade Credit is where you are able to access kind of a buy now pay later facility so A supplier for example might offer Trade

Credit and that’s actually incredibly common with business to business transactions so they might say for example you can receive the goods now or the supplies now but pay within 30 days 45 days or what have you you might offer Credit to your customers as

well and so when you think about Cash Flow one potential thing to think about is making sure that you are going to receive the cash from your customers before you have to pay your suppliers um so Trade Credit can be used in both senses but in this sense we’re

talking about this as a source of Finance for the business and so Trade Credit is about the business being able to get supplies and pay for them after a period of time often

this is not going to have any interest in it more often than not it’s going to be an interest-free agreement it’s just kind of the way things are paid for and it allows you as a business to get the supplies and then hopefully turn them into Revenue and generate

Cash Flow before you have to pay your cash outflows and then finally we’ve got grants as well so a grant is a non-repayable sum of money from a government could be from an organization um mostly are from governments the idea here is a grant might be available to someone

who’s maybe meet certain criteria or is providing a certain good or service you might be able to get a grant for certain things that covers our internal and external Finance the next

topic is liability Liabilities been mentioned already in these CashNews.cos in theme one when we talked about forms of business 1.5.4 because when we talk about liability we’re talking about limited liability and unlimited liability which are mentioned in terms of our

Incorporated and Incorporated businesses so let’s just go through those differences again limited liability is where you are where the responsibility for Debts is limited to the company so the term liability is is effectively legal responsibility and so the legal

responsibility for these Debts is limited limited liability you get it to the company’s Assets and so if there are Debts that exceed the value of the company the company will have to sell all of its Assets and potentially

then of course be bankrupt but that will be the end of it the personal Assets of the owners will be protected so this is our limited Incorporated companies our LTDs our private limited companies not plcs are publicly limited companies unlimited liability is where the responsibility

for Debts is not limited to the company’s Assets and therefore personal Assets are at risk and these are our unincorporated companies our sole Traders and our Partnerships so the first distinction in this topic is to know the difference

between limited unlimited liability the second is to make sure you’re aware of which sources of Finance are suitable for different liability businesses so for example a limited

liability company can raise share Capital because they’re an incorporated company you can do this it’s obviously easier for a PLC because they’re going to be sharing selling their Shares publicly whereas a unincorporated business is altered or

partnership they can’t sell Shares because there is no legal I guess legal separation from the from the organization to the owners in terms of the sole Traders and Partnerships they can’t sell Shares they’re likely to rely on owner’s funds

and actually technically and they can get quite complicated but technically owner’s funds don’t exist for limited companies because you if an investor sorry if an owner was putting more money into the business they would do that through an issue of Shares so it would

technically be share Capital they were raising but a sole Trader or partnership they’re quite likely to heavily rely on owner’s funds there are other sources of none;">Finance that are available for both of course but these are the kind of main distinctions in terms of what is certainly only available for certain certain types of um business with certain liability the last Topic in this unit is 2.1.4 planning and there’s two parts to

planning and actually I think you’d think about the first one which is a business plan and given the topic is called planning naturally you would think business plans are probably the biggest part of this but then they’re not really the the most the biggest part of this is actually the

second half of this A business plan is the document that a business creates an entrepreneur will create one when setting up a business and it will set up the aims and objectives it’ll sell out what the business wants to achieve and it will start to give an idea of how a business is going to

achieve that so there’ll be a marketing plan there’ll be an operations plan you Dem you’re demonstrating ultimately potentially to yourself in terms of organization but to investors and to to potential employees um what it is your business is looking to achieve and how

you’re going to do it and so it’s really really helpful in terms of accessing some of those sources of Finance for example a bank Loan for example venture

Capitalist business angels they may wish to see a business plan in order to make sure that they have confidence that their the investment will repay what they put in part of the business plan will also be the Cash Flow forecast and the Cash Flow

forecast is a financial table there’s plenty of financial tables in theme two this is the first of which it is a forecast of the cash inflows and outflows over a period of time and one thing that’s really important is and we’ll talk about this as we go through this unit is the

difference between cash and Profit we’re not talking about Profit here we’re talking about when cash as in immediate money comes into and leaves a business’s bank account so this is more like a kind of a financial statement of like a bank

statement it looks something like this so in this one we’ve got January February we’ve got cash inflows outflows we’ve got net Cash Flow opening balancing closing balance so you could argue that this is basically like a bank statement for the months of January and

February we can do some calculations here I’ll talk through those as we go through some example figures but you might see a table it wouldn’t necessarily look like this but it would be in this order instead of seeing cash inflows it might list examples of cash inflows so for example it

could be cash sales it could be a bank Loan it could be owned as personal funds what have you anything that comes into the business would go in there and then your outflows could be all sorts of things it could be the running cost of a business but the key thing is the money will

be when the money leaves the bank account so for example if in January we made five thousand pounds of Credit sales which we didn’t receive until the following month they wouldn’t appear in January they would appear in the month where that cash joined the business so

potentially February so let’s have a look at some example figures here let’s start with an opening balance let’s assume that we have an opening balance of 100 at the start of January and then we’ve got cash inflows of 250 pounds we’ve got cash outflows of 300 pounds so

we have more out than we have in so our net Cash Flow would be minus 50 and you can see on a financial statement you could see a minus or you could see brackets means the same thing what that means is the first calculation here is net Cash Flow which is Cash

inflows minus cash outflows so 250 minus 300 is minus 50. and then the second calculation is to work out our closing balance well if we started with 100 pounds and our net Cash Flow is negative 50 then our closing balance is going to be 50. and the reason for that is we’ve

done the calculation opening balance plus net Cash Flow now in this instance we are plusing a minus figure so that means our closing balance is obviously going to be 50. the second month February the first bit of information we need is to know what our opening balance is we start

with our opening balance for January we’re gonna do the same with February if our closing balance in January was 50 then we’re obviously going to start February with 50. so our opening balances that unless it’s given to us like for example in the first month they might give you an

opening balance after that it’s going to be the previous month’s closing balance and then let’s do the same figures again so we have a 400 cash inflow we have a 300 cash outflow so in this month our Cash Flow is better our Cash Flow would be 100.

if our opening balance was 50 and we’ve got a net Cash Flow of 100 50 plus 100 is 150 so that covers our Cash Flow forecast so the most important thing there is making sure you’re aware of the calculations make sure you’re aware of the concept

making sure you’re starting to get an idea of what cash really really means it’s really important that you understand the difference between cash and cash inflow and Revenue for example there are plenty of Revenues that aren’t cash there are

plenty of examples of cash inflows that aren’t Revenue hopefully that makes a lot of sense hopefully you found that very fairly useful um as mentioned of course but at the start of the CashNews.co there are a bunch of resources in the in the description if you have any

questions about any of these topics please pop them into the comments and you’ll see me and hear me well you won’t see me I don’t put my face in these CashNews.cos no one wants to see that um you’ll hear me in the 2.2 CashNews.co as well see you next time