If you're an NXL Alevel business student and are looking for a video to revise all of theme 2.1 raising finance, well, this video is for you because we're going to go through everything that you need to know for your exams, including the different sources of finance, both internal and external. We'll also take a look at the difference between limited and unlimited liability. Then we'll take a look at our business plans. And then finally, we'll take a look at our cash flow forecasts. Let's get into it. The first topic in this revision video that we'll be looking into will be our different internal sources of finance. So when we look at internal sources of finance, it's meaning that we're using our own business resources and capital to keep funding the business. The very first method is your owner's capital. Now this is the money that is invested by the business owner from their personal savings typically to help start or expand the business. Now, if you have a lot of money, then yes, it's a great source of finance. But it depends. It depends how much money is needed to start the business because if I'm trying to start a protect company, unless I'm a secret millionaire, which I'm definitely not, I'm going to have a look at some external sources. But you also have to appreciate this is money coming from your own personal savings, meaning that this will be at risk. Our next type of internal finance that we've got is our retained profit, also known as retained earnings. Now essentially what this is is the amount of money that a business has after paying their dividends to shareholders from their profits that they can retain back into the business. Now essentially retain profit is that if the business still has some profit left over after paying their dividends to their shareholders which is just a portion of the profits going to your shareholders then this can be reinvested back into the business called retained profit. Now this is what our income statement or profit and loss statement would look like. Now when we look at where the money is coming from from our retained profit, it will be around our net profit after tax. You know, we can pay our shareholders some dividends. You do not have to though because the board of directors may decide that actually we want to keep the profit in the business to keep growing the company. Now this is a brilliant source of finance because you're not borrowing the money so there's no interest. You're also not selling ownership to new shareholders so you retain control. And if the business is highly profitable, it can be a great source of finance to use. The caveat is though, it depends on how much profit you're making. Because if the business is only a start of business or really isn't making that much profit, then you can't really use this as a great source of finance and would typically have to look elsewhere for funding. And as well, the more profit you retain, the less profit is going to your shareholders as dividends. So, they might not be the happiest about it. And our last type of internal finance we'll look at is the sale of assets. Now when I talk about assets, I mean non-current assets or fixed assets. And essentially these are items that the business owns that they intend to keep for longer than 12 months to generate a bit of economic benefit from. So typically if a business has some unused non-current assets, so for example, property, machinery, and equipment that they're not using or not utilizing to the fullest, then they could look at selling it because they're selling off any unnecessary resources and it can provide a lot of cash for the business. But not only that, let's say, for example, we've got a property where capacity utilization is 25%. Well, typically we have a high unit cost because fixed costs are being spread over a few units produced from that factory. So if we sell that factory, we don't need to pay for the operational expenses to keep it up and running. For example, your rent, your employees, your utilities. However, the problem is that asset could be useful in the business's long-term strategy. For example, if I sell a delivery vehicle, well, that's one less vehicle I've got to deliver my products. If I sell off some machinery, I won't be able to use that now for production. So, we could potentially look at reducing the business's overall capacity by doing this. The next topic that we'll take a look at in this revision video, which is a nice topic to follow up on our internal finance, will be our external finance. And the first type of external finance that we'll take a look at will be loans. And these are probably the most common form of external finance. Now, a loan is when you borrow money. You typically borrow it from either a bank or a private lender. and you have the agreement that you pay back over time. Now, you'll typically sign what we call a loan agreement which basically approves how much money you'll borrow as well with the interest rate. Now, when we talk about interest rates, they are the cost of borrowing and the reward for saving. So, when we look at the cost of borrowing, this increases your business's cost, typically your fixed costs. The loan provider as well might try to ask you for something called collateral, which is basically when you sign up assets of the business to cover the actual loan itself. So, let's say I borrow £100,000 and I'm not able to pay it back and I've signed up a building worth £100,000. Essentially, the bank could take that asset off me worth £100,000 to cover off the loan payment. Now, when we look at a small business trying to get a loan, well, of course, smaller businesses, they've got less evidence, so they're going to be successful. So, a provider may see it as more of a risk. So, typically what they would do is they would charge higher interest rates. But, of course, vice versa. If we are a larger business, we're seeing as lower risk, more negotiation power. We will typically see lower interest rates for a larger business to borrow some money. Now, when we look at loans, it is a brilliant source of finance. You can get loans for tens, if not hundreds of millions of pounds. So, you have a lot of cash coming into the business. And in that loan agreement, you'll typically sign, well, when do you have to start paying it back? Which really helps for our cash flow planning. And most importantly, we're not selling parts of our business to get this funding. However, interest, that's the issue when it comes to loans because remember interest is the cost of borrowing. Therefore, if you're borrowing money, you have to pay interest. Therefore, your costs go up. And it doesn't matter how the business is performing. So, we could be thriving in economic boom or we could be struggling in an economic recession. We still have to make those repayments. The next type of external finance we'll be taking a look at is share capital. Now share capital, you can only raise this if you are a private or a public limited company. And what we mean by share capital is that we sell shares. We're selling part ownership of the company in return for money. Now the money that's being invested into the business that is what's called share capital and this is an equity source of finance meaning that I don't have to repay. I'm not borrowing the money. They have brought ownership in my company. Now, share capital, it is a brilliant source of finance, especially for your public limited companies because they are selling their shares on the public stock exchange. And remember, we do not need to repay this amount of money that they've actually invested into the company. However, we're giving ownership away. That means our ownership, the current investors and the current owners, they are diluting their ownership. So maybe before I had 100% ownership, now I've only got 40%. And those other shareholders will be wanting to put their ideas forward potentially impacting decision-m and as well yes I'm not repaying them back but they do have the right for a dividend. So if ever I do pay dividends in my company they will have a portion of that. Our next source of finance is something called venture capital. Now venture capital is a type of private equity funding for startup or small businesses who do show a high growth potential. Now, when we look at venture capital in these small businesses, these are going to be your private limited companies because we're selling shares and you don't really see venture capital for public limited companies because anyone can invest into them. So, we're investing some capital into that business in return for ownership. Now, when we look at who your venture capitalists are or who your business angels are, these are typically very successful entrepreneurs who have made a lot of money for starting their own business. So if I'm a small startup business founder, I'm not just getting money, I'm getting guidance. I'm getting access to their mentorship, access to their networking. So it's not just money. And remember, the money they're investing into the business, I don't have to repay them, although they may look for exit strategies. But remember, I'm selling ownership. This is probably the bad thing about venture capital is because they will be invested in the business that they're going to try to help, which, you know, is a good thing, but they're going to be putting their ideas forward. They're going to be potentially influencing my decisions and of course they have part ownership within the company now and they are going to be investing some of their own personal money or in a venture capital firm it'll be a group of people's money. So they do want a lot of returns for their investment. The next type of external finance we'll take a look at is a bank overdraft. Now essentially a bank overdraft is when you can go into a negative amount in your bank account. It's a bit like a safety net. You're spending more money than you actually have. So, for example, if I'm buying something worth £10,000 and I've only got £5 grand in my bank, well, my bank overdraft, if I've got one, will go into negative £5,000. And you would have to agree this with your bank before you go into one. Now, when we look at bank overdrafts, they are a short-term source of finance. You know, venture capital, share capital, and bank loans, they're all long-term. The reason being is one, the amount of money you can get is obviously a lot smaller, but two, especially compared to your loans, the interest rates are much higher. You know, an interest rate for a loan could be 6%. For a bank overdraft, you're talking potentially 20 to 40% a year. So, you don't want to be in that overdraft for very long because every day you're in that overdraft, you're paying more interest. The next type of external finance that we'll take a look at is something called leasing. Now, leasing is different to the sources of finance that we've already looked at, such as loans, share capital, venture capital, because we're not receiving money because all leasing is is that instead of buying an asset outright, typically that non-current asset such as a vehicle, such as a building, such as property, we are renting it instead and we are going to be making regular payments to use it. Now, it's a good thing because it actually saves the business paying a large upfront fee for the asset, which is brilliant in the short term. The problem is is that over the long term, you may find that you actually end up paying more than you originally would have had to. The next type of external finance we'll take a look at is something called trade credit. Now, once again, different to borrowing or selling shares to actually raise capital because trade credit is more so of an agreement. Now, let's say I'm trying to get £100,000 of raw materials from my splend. Now, what trade credit does, instead of me paying the full amount today, I would pay it at a later date. So, I could go to them and say, "Well, how about I give you £25,000 today and I'll give you the rest of the £75,000 in two months time." Now, the reason why we want to do this is because if I have that £100,000 of raw materials, well, I'm going to be using it to make my products. And of course, we have our products to sell. Now, from selling those products, I could make £150,000. But if I had to pay my suppliers up front, then I may not have been able to have £100,000 worth of raw materials today. So when looking at how this starts to impact us financially, well, our cost of sales will still say that we have spent £100,000. So we have to record the cost for the amount. But cash, we only record the amount that's left my bank, which is only £25,000. And then we have this thing called trade payables, which you'll find typically on your balance sheet. And all it says, well, how much have we got left to pay off our suppliers from that order? We've only paid them £25,000. So, we've got £75,000 left. It's the amount you owe to your suppliers for goods brought on credit. Our next external finance we'll take a look at is something called grants. Now, grants, these are nonreayable funds to support businesses, often for specific projects, innovation, or growth. You know, it can be given by government or private organizations. You may need to apply for certain competitions and do business pitches, but there are certain criterias as well. So, for example, there may be grants for young entrepreneurs, for businesses that solve social objectives. It's key to know grants are extremely competitive. So, unless you've got a really good idea, it may be quite difficult for you to get one. And our very last external finance that we're going to take a look at is something called crowdfunding. Now crowdfunding is a way to raise funds by gathering small contributions from many people to finance a business project or idea. Now crowdfunding projects typically set what we call a funding target and aim to attract investments as we said from a large group of people. You know in return they may have ownership they may get rewards or exclusive perks. They may be in debt or they can just be around their recognition. So you may find it's a donation. Now, crowdfunding is good because you're attracting public interest. You're not just getting funding because if I'm trying to start up a new bakery shop within my local village, you'll typically find the people crowdfunding it will be the people from that local village. So, I'm gaining that interest already and that community support. And sometimes crowdfunding is a great way for startup businesses where this finance wouldn't be available anywhere else. However, the problem when it comes to crowdfunding is that there's no guarantee you'll hit your target. So, let's say I've got a crowdfunding target of £40,000. There's not a guarantee that I'll hit that. I might only raise £5,000. So, I potentially may have to look elsewhere for the funding. And as well, if I'm looking at crowdfunding with a unique idea, well, that idea becomes public and then can be stolen by a larger competitor. The next topic in this revision video that we'll take a look at, which may seem familiar from theme one, is the difference between limited and unlimited liability. So we'll start off by explaining what we mean by unlimited liability. Now essentially unlimited liability is present in business forms that are unincorporated which essentially means me as the business owner and the business they're treated as the same legal entity. So if the business was to go into debt and I can't pay off that well then my personal assets now become at risk because I'm the same legal entity as the business. And when we talk about personal assets think about my car, think about my house. These can be seized in order to pay off the debt that I haven't paid. And as we said, this is in unincorporated business forms. So your soul traders and your partnerships. Now when we come to limited liability, this is when me as the business owner and the business themselves, we're unlimited liability. We're the same legal entity. But when we look at limited liability, we are now two separate legal entities. So if the business was to go into debt, I'm a separate legal entity. Therefore, my personal assets are protected. So, my house, my car can't be taken away to pay off the debt. And this is in our incorporated business forms. So, your private limited companies and your public limited companies. Key word there, limited companies have limited liability. The next topic we're going to be taking a look at in this revision video, we'll be having a look at our business plans. Now, what a business plan is is that this is a document outlining the business's goals, strategies, and financial forecasts. You'll typically use this when you're trying to get some investment. Now, for example, it'll have a summary of the business. So, an overview of what the business does, our mission, our key objectives. It'll also take a look at the business opportunity. So, what gap in the market that we aim to fill. We'll also take a look at our financial forecast, so predictions of our revenue, cost, profit margins, and cash flow. We'll do as well some market analysis, so of our target audience, the industry, trends and competitors. We'll also include our marketing strategy, so what type of advertisement methods are we going to include? And finally, the people involved in the business. Now, a business plan is going to be used to help us gain some funding. You know, if I'm an investor looking to invest in a business or I'm a bank about to give a loan to a business, I want to know the company inside out. So, I want to know, am I going to get my money back? Am I going to make a return? So the idea of the business plan is to show the viability, profitability and the risk management. And the very last thing that we need to do in this revision video is take a look at our cash flow forecasts. Now what we mean by cash flow start of all is that this is the movement of money into the business and out of a business over a period of time. Now cash flow this is crucial. You may have heard the term cash is king because for a business to survive, it needs to make sure it can pay its expenses and operate effectively. And this all depends on the cash flow. And typically cash problems tend to arise when the business's cash outflows outweigh and exceed the cash inflows, which would typically lead to a negative net cash flow. So what a business would want to do, they want to put a bit of a cash flow forecast together to make sure they're in a healthy position. Now, what is a cash flow forecast and how does it look? On the screen here, we've got an example of what one would look like. Now, this would be made potentially in December looking at the next few months, January, February, March, April. And we're broken down into key categories. First of all, we've got your cash inflows. This is any money flowing into the business. So, not only is it just revenue, it's also any of our other sources of finance. So, we've got cash sales and we've got our bank loan. Then, we've got what we call cash outflows. This is any money flowing out of the business. So on the screen here, we've got our salaries, we've got raw materials, we've got rent, could also be any other utility bills, payment to suppliers, and any other costs the business may have. Then we're on to some of our calculations. The first thing we need to do is to calculate the net cash flow. The formula is really simple. You all you do is your total cash inflows minus your total cash outflows. Then we've got what we call the opening balance. Now, all an opening balance is that at the start of the month, how much money do you have? Now, of course, that would be the exact same as the closing balance as the month before. Because if you finish February on £1,000, you're going to start March on £1,000. So, as you can see here, at the end of Jan, we had £800,000. So, at the start of Feb, we had £800,000. And we do the exact same thing for March and April. And the last thing that we need to do is to calculate the closing balance. And once again, really simple formula. All we need to do is to take our net cash flow and plus that to our opening balance. Now, cash flow forecasts are incredibly useful because it helps us identify any cash flow problems in advance because let's say we're in March now and in June I've identified that I'm going to have a cash shortage. Well, knowing that in advance means that I have time to prepare. I may look at some sources of finance to solve that problem. And as well, it helps to secure some funding. So within your business plan, you would typically have a cash flow forecast because once again, if I'm an investor, if I'm a bank trying to give you a loan, I want to make sure that the business is viable. And finally, it can help us with making some decisions because if we're looking at, well, should we expand over the next few months into new countries, into new markets? Well, what does the cash flow forecast tell us? If we do so, we can prepare one. And are we going to be financially viable? Now, yes, your cash flow forecasts are good. However, they do have problems. Now, it's in the name. It's a cash flow forecast, meaning we're trying to predict the future. Now, no matter how hard you try, there will always be those uncertainty and unexpected events that you can never plan for. So, you have to appreciate it is just a forecast. It will be prone to inaccuracy because someone in January 2020 thought this is going to be an amazing year for all businesses. Then in March 2020, we had COVID. we had all those lockdowns. You cannot plan for those type of events. And it does depend on well who's made it. Who's made the cash flow forecast? Is it a startup business founder who doesn't have any experience or is it your chief financial officer? And creating the cash flow forecast is going to take a bit of time. Think of the opportunity cost. What could you have done instead? And just because you have something planned out and something forecasted and identified all the problems, that doesn't mean all of it is now resolved. And it doesn't mean you can resolve it either. If you found this useful and you want to carry on your theme 2 revision, I highly recommend you check out our video here on theme 2.2 financial planning. In this video, we're going to go through all the key things such as break even analysis, budgeting, and more. I hope this video has helped you with your revision. Thank you so much for watching and I'll see you in the next