 Hey guys, it's MJ, the Student Actory, and welcome to the first lecture of subject CT2. This one is called Budgeting and Financing Decisions, and it is the first section of Chapter 1 of subject CT2. So these lectures are going to be all audio, so you can listen to them while you're driving just before you go to bed. You don't have to look at a screen, so I'm hoping this is going to give you more opportunities to listen to it so there aren't any visual cues. But anyway, let's jump straight into it. What is budgeting and financing decisions? Okay, it's quite a meaty topic to start off with, so I think the best part is to just take a step back, and ultimately what this chapter is about is we're talking about the financial side of a business. Now what exactly is a business? I know it's quite a common term, I'm sure we've all come across it, but when we look at the core of it, what is a business is quite interesting, because I mean, a business, it's not like a physical thing, you know, like a tree or a car or something that you can touch. A business is more of like what we call a legal fiction, so it's something that is made up but recognized in law. That's why when you come to start a business, you fill out a form, and the government or some organization says, okay cool, we're going to register your business, we're going to acknowledge that it is actually something, but you can't go and touch a business. So that's quite, it's interesting or it's important to realize that a business is this legal entity, and businesses are important because they make up the markets, they make up the economy, you know, when we go and buy stuff, we're normally buying from a business, when we're using a service, the service is normally coming from a business, so we are engaging a lot with businesses on a day to day basis, and like I said, they're a key component in the overall global economy. Also with businesses, I mean, you get various types of businesses, you get non-profit businesses like charities or churches, then you get for-profit businesses that can be further split up into partnerships, closed corporations, sole traders, public company, private company, you know, there's even some called co-ops, there's a lot of various types of businesses each with their own unique flavor. Businesses also have quite a few different types of dimensions, businesses have an overall value, they've got some legal dimensions like who owns them, what are their restrictions, what can, can't they do, but I think most importantly what we want to focus on in this lecture is what are businesses made up out of, you know, what makes up a business, and there's various things, I mean, the employees, the premises, their mission statement, but the one I want to just focus on for this chapter is the assets. So a business is made up of assets and liabilities, let's look at the assets because what we wanted to talk about in this chapter is, there's two main questions that we're going to be asking is what assets should we buy and how are we going to raise the cash in order to afford these assets, and that's what finance is, it's raising money to do these projects, projects need assets and businesses normally carry out projects. So in a lot of corporations, what you have is you have this defined role called the financial manager, and he stands between the firm's operations like what they're actually doing and the big financial markets, you know, everybody else, and he kind of sees, okay, let's say we're a shoe company, we're going to make some shoes, in order to do that, we need to rent a factory and we need to buy some big shoe making machines. How are we going to do this is we're going to go to the financial markets and we're going to raise cash in order to buy the machine so we can start producing shoes. Now, how do we raise this cash? Well, there's three main types, but there are lots of ways to raise cash, there's actually, yeah, there's lots of ways, but we're just going to focus on three quick ways here. The one is you can go to the bank, you go to the bank and you say, listen here, a lot of people are depositing money in your accounts, it's just sitting there, give that money to me, I'm going to build a cool shoe factory, I'm going to make shoes, I'm going to make a lot of profit, I'll give you the loan back along with some interest, so by you lending that money to me, I'm going to make more money for you and banks will normally go like, well, it's better than the cash just sitting here, you look like a reasonable oak, don't steal it, don't stuff up, here's the cash, we want it back in six months time. Or let's say the bank says we don't trust you or we don't want to do business with you, we don't believe in it, what you can do is you can issue debt, so you can go to some wealthy individuals or a bunch of people in the streets and you can say, please guys, can you give me money, I need to build the shoe company, it's going to make profit, I'll then pay you back after a certain period of time. I guess the modern form of this is kind of like Kickstarter or these online crowd sourcing platforms. Another way to do it is to go to some guy who's got a lot of money and tell him say, hey, instead of you keeping that money in that bank, that stupid bank that wouldn't lend the money to me to build the shoe factory, why don't you take your money out of the bank because it's just sitting there, inflations eating it up, the interest rates are really low in today's market. Why don't you give that money to me, just give it to me and in return I'll give you a percentage of my shoe factory business. So you provide the funds, I'll give you say 50% and then what we do is we'll start making shoes and all the profit I get, I'll give a certain portion over to you to say thank you for investing and believing in my dream of building the shoe company. So that's three ways on how the financial manager will look at ways in order to raise cash. But I mean it's also very important what assets to buy in because he might say do we buy this type of shoe, making machine or do we rather assemble a whole bunch of workstations and employ people like would that maybe be cheaper and it creates more jobs, then they can also look at the social factor. But they're mainly focused on the finance and but yeah, these are the two questions they need to juggle. What do we need to buy? How are we going to raise the money? And you want to make your purchase, you want to buy something that's you know the best price and you also want to raise money at the lowest cost because remember the banks will loan you the money but they might charge you a very high interest rate in which case all the profit you make from making the shoes goes to paying off the bank and then you've done all this work, all this effort and at the end of the day you've got nothing to reward yourself with. So that's why it is important to budget you know make these budgeting decisions saying how much money I do I need, what are my expenses, how much are the assets going to cost, how much money am I going to make, how much do I have to pay my employees, how much am I going to pay back to the bank, how much is going to be left over for me and then ask yourself is it worth all this work because I mean and that's the thing starting a business is no easy task it is very difficult it's going to take a lot of time, a lot of effort and a lot of stress and this is why not a lot of people do it and the people who do do it get rewarded you know with a lot of money they become wealthy because it is quite a challenge but it's also a challenge because it might not go according to plan I mean China might start making shoes at a fraction of the cost and import them or another shoe factory might introduce a better style or you might make an advertising campaign that you know alienates the customers because it's stupid and then your whole business fails so there is a lot of risk when it comes to business as well not only do you have to put in a lot of work and a lot of effort into creating a business but there's also the potential that you do all of that and it just blows up in your face just due to unfortunate events you know risk things going against you and that's why you can create all these beautiful budgets you can project all these cash flows but you really need some sort of actuarial skill or an actuary on board to take in the fact that you know the future is not that predictable and you need to account for this uncertainty but I mean when you're doing a business you want to go in with a big team I mean you want to get also advice from lawyers making sure that shoes that you're making aren't infringing on any patents and that the regulators have allowed you to do so you want to make sure that your marketers give you the best advice on how to market the product so that can actually be sold you want to get advice from you know the technology experts you're saying oh this material is better for this or this company makes a better shoe machine than that one and then also you want to get the accountants who just keep a good bookkeeping system of all the financial transactions so that you know where all the money is going because when you start doing business there's money coming in there's money going out money changing hands changing hands and you need the accountants to just say well guys let's record all of this let's keep an account of where all the money is going and that's the thing is when you do business there are lots of different potential paths and so you need to prepare certain action plans and almost be prepared for you know what's the worst that can happen and I might say at the at the end of the day you might come up your heart might just be set on building your shoe business and making shoes because you might just love it and and this is a little bit of a worrying side to business is sometimes people who just want the deal to work or they're so desperate to get this they've got this dream to make these shoes that they ignore or they tweak the numbers in such a way that it looks favorable to do the project and we call this bias this is when the project appraisal is no longer objective and gets contaminated by human irrationality and this is another thing that hopefully as Actories will be able to see through and you know raise the flag if we see it happening so that capital project appraisals can be done in the most objective and perfect way so that they can aid the businessmen in making the best decision because at the end of the day we want all businesses to succeed the more businesses succeed the better the economy the more prosperity is created and poverty starts to diminish I mean the whole idea and gets behind capitalism is that everybody at the end of the day gets rich but the people who work hard and do all the business now they're going to get rich in the beginning first but it is it is a system that that works from a financial point of view and that's what this course is going to be so yeah that is lecture one done of budgeting and financing decisions feel free to ask me more questions in the comment section below also feel free to answer any questions people have asked me you know I mean I need your guys help I don't see all comments so answer them if you can and y'all let me know give me some feedback did you enjoy the style of lecturing what should I do better should I talk quicker should I talk slower should I give more examples let me know in the comment section below hit subscribe because like I said we've got another there's gonna be a lot of videos done on this topic so subscribe and stay tuned for more and y'all share them with your friends because it's much better to study as a group you guys can then discuss the various points afterwards and also share this course with someone who you know is an entrepreneur and who wants to start building a business of their own you know this theory will not guarantee them success but it will help them to understand and hopefully make less mistakes in their journey but y'all that's all for me now thanks guys for listening I'm MJ the student act tree and I'll see you next time y'all the next video will be on business objectives cheers