 Hey guys, this is MJ the student's act tree and this is episode 4 of the financing model in this video We consider the final method which is crystallization, but just a general recap this model is looking at four different ways of financing the purchase of a new asset for a business that is going to generate extra sales the four methods are self-funding so the business raises up enough money and When it has enough in the bank account as we can see here it then purchases the asset Which causes the profit to increase going forward the other three methods? Look at getting the money up front right in the beginning and the benefit of this is that you can see the profit starts at a little bit of a higher rate Because of these extra monthly sales that are generated so the higher those monthly sales are going to be the more Beneficial it's going to be to go for one of the the funding right at the beginning and The three ways you can fund money from the beginning the one way is to take a loan How a loan works is someone gives you money and they don't really care what you do with it as long as you pay back So it doesn't matter how much money you make or how much profit you do or how many things you sell You're still going to pay a fixed amount until you've repaid your loan and This is what we've got over here We can adjust the interest rate and the term of the loan check out my video episode 2 where I discuss this in more detail Another method of raising finance is through equity equity is someone gives you some money And they are very interested in what you do with it because they are going to be getting a proportion back in the form of a Dividend so they're very concerned with how many items you sell and they're very concerned with what is your profit margin? You know, what are your operating expenses because they share in the business? So if the business is very profitable they get some profit But if the business doesn't do very if the business does very badly, they're not going to get that much money back So it is a little bit more risky than the loan for from the investor's point of view and So like I said, they're going to be very interested in your sales and in your operational costs and activities And then there's a third method which I don't think you guys are going to be very familiar with it is something that you only learn in actuarial science honours if you take finance as a speciality and It's something known as crystallization and crystallization To try and keep this explanation quite nice and simple It's when somebody gives you money and they're only focused on the sales So the volume of the sales they don't care what your operating expenses are They don't care what your profit margin is. They're just very concerned with the volume that you're selling So the more you sell the happier they are because the agreement is that for every item you sell They get a reward that is crystallization So those are the three Three ways of raising finance. Oh, yeah, if you want to look more about the whole equity that is in episode 3 So this is the final episode episode 4 We're going to be considering the crystallization and we're going to be doing the final comparison of them all So with the model, this is it in a near final state you can these are the following input so you can input the amount of Money that the business starts off with initially I've got it as zero, but you could you know say they've got five hundred thousand You know starting off in the bank and you can see how this will now Allow them to purchase the new asset much earlier and extend it We remember if we make that zero there, did you see how that jumps over there? So that's that's what the starting bank balance. It's mainly for the self financing route Because the more money you have in the bank the earlier you can purchase the new asset Which is good because you can generate more sales. I've then got the monthly sales How much are you selling? How much volume? In I mean in the example we've been talking about beer So this could be the amount of beer that the bar is selling every month so seven thousand beers Then what we have here is the price per sale. So how much does each beer go for? Here it's going for 40 Rand. Rand is a South African currency Around 20 Rand equals a pound If you want to do a little conversion in your head So that could be what two pounds and that's one pound But anyway, we're gonna stick to rent because South Africa is the best country in the world So this is the price per sale of the beer and so the greater we make that That's gonna be influencing a lot of the crystallization and I'll get back to that one the one which Affects equity loan or basically all of them is the profit per sale So I mean if we take that from 20 and we push it up to say 30 This is the profit margin. You can see all the numbers jump up So the higher the profits the better It is for for everyone and this is where businesses make their money This is where they add value to society the fact that they can add a profit to the sale of an item Shows that they're doing something right Then what we have is the annual volume increase. So every year The business could expect their their sales to increase. I mean, we could even make that zero You can see makes the the profit Graph look a little bit boring then we can make it say five percent we can make it twenty percent and We'll see this is gonna be having bigger effects later down the line, but let's just keep it there at ten percent Then we've also got the monthly interest rate that the bank balance accumulates by This is monthly interest rates. So you can make it I mean you can make it a half a percent or whatever the interest rate is. So it's just showing one Because I need to show There we go show more of the things. Okay, this is the price of the new asset So this is how much the new bar is gonna cost in the case of beer It could be the cost of a new factory whatever new shop all that type of stuff and We also determining how many there are so we could even check this out if we make it to new bars You can see how it adjusts the prices and stuff like that And you'll see self financing that has to wait again before it can buy the second boss So you can see self financing really struggles when you're buying To or I mean look at what happens if you make it even three you can see how that value goes The reason being is that the other three methods are benefiting from the extra monthly sales right in the beginning So let's just keep that as one And then your extra monthly sales again the higher this value is the better It is to get the money in the beginning. I mean if we made it one extra sale you could see I mean here we see on the graph bank almost jumps up to second second place Self-financing, but anyway, I'll get I'll get to that. Let's just keep it at six thousand Over there So we will expect it to perform just a little bit worse than the main bar because the main bar has been going for a while And like I said sales do accumulate every every year. So these are the assumptions we making so remember all models have got a whole bunch of assumptions so This is the information we put in and remember with equity We could say how much equity you wanted to sell at least if we made it just say 25 percent. Oh, you can see equity Jumps up to second place. I mean if equity is 1% then you can see equity is the best option So what that's saying? Let's jump to the output is that is it beneficial to do equity? This is comparing to self-finance the answer is yes the total equity invested and the total cash that they receive is Miniscule so we're saying they're just going to get 1% of the profits you can see it is a dreadful dreadful Return for the company, but I mean if they had to say take 50 percent We can see that it's no longer beneficial. They're investing three million. They're receiving back Nine and a half million. So they're getting a great return, but look how much that is costing to the company And that's what this graph over here showing look how expensive equity is if they take a big chunk Then with loan, I mean we could but let's just bring this back to something more reasonable say 30 percent Loan this is this is one where the higher the interest rate The the worst it is so this is a monthly interest rate because we're assuming that things done monthly Check this out if we say make this 5% Look how how loan then jumps up as the most expensive form of financing in this case You'll be borrowing three million if you pay back almost seven and a half. Oh, yeah, just over seven and a half million if we make interest rate three percent you can see it's beneficial and you're only having to pay back five million and You can see it's actually comes in cheaper than equity. So just like this this model is very beneficial for people who just want to see Compare loan equity to self financing. I mean this model is fantastic for it but I have added in this extra feature known as crystallization and That's what I want to show you guys now This is where where finance gets very interesting and it's a little bit mysterious, but because watch this crystallization is the best option and What happens here is that you determine how many how many months of beer you're going to be crystallizing then this is the amount of investors you want and This determines when people redeem the the coin Or redeem. Yeah, so what sorry, let me explain the coins there The idea with crystallization is that you crowdfund so in this case We want to crowd from from a thousand people so a thousand people come to the business They give them each where's the matcha cost per crystal they give three thousand each And then what happens is that's where we get the three million from so the the money's been Raised through crowdfunding in a sense and then each person who buys a crystal They're gonna get one thousandth of a beer token. So every time a beer is sold a beer token is generated this is a beer that needs to be redeemed by the investors and How it works is that you spread it among the thousand people so what then happens is After you sold a thousand beers each person will have one beer token They can come into a bar and redeem that beer token for a glass of beer And the fun part is that over here For the company or the business beer cost 20 rent But to the public or the investor that beer is worth 40 rent and remember crystallization is based on the amount of sales So sales and the price of that item Whereas equity is on the sales and the profit per that item. So because of that we're gonna be seeing that for the The people or the investor who goes to crystallization route is they're getting a hundred and eight percent return That's an annual return of a hundred and eight percent and that is huge Compared to say 38% that the investor is getting if he goes equity by buying 30% and the reason for this discrepancy is because of the price. So I mean if we make that price 30 You'll see how that jumps down to 56 if the item is a hundred and you can see it goes up astronomically high So in this business it works very well for businesses that have quite a high markup on their their items Whereas you can see profits If we increase the profit to say 45 or no, that would be So they say be a cost 10 round and they sold it for 30 round Okay, look at that crystallization doesn't change at all But look at equity equity jumps up to 57% return So equity is very sensitive to the profit per sale Whereas crystallization is not affected by the crystallization is affected by the price So You can see by changing the profit per sale It does not affect crystallization and this makes crystallization a very Interesting proposal for an investor if I'm an investor and I think the sale of beer is going to go up But I don't want to be exposed to how the barman runs his bar What his expenses are what he uses the the money for how much staff he employs Then I don't want to go the equity route because going equity. I'm influenced by that I don't want to go the loan route because it I'm thinking beer sales are going to go up I'm not getting any upside exposure by going the load so crystallization gives me the option to get that exposure on the sales of beer without having the exposure to how the business is run and That makes for for a lot of fun and where the the big bonus comes in is That or although I guess you could say this is the big con of crystallization Is that you are paid out in? Coins so you are paid out in these tokens a cryptocurrency can be based on a blockchain or on a database where you get these coins for Return instead of cash, but these coins can then be redeemed for the product. So and That's why it's crowdfunding. So with equity might have one investor with loan You might have one bank issuing the loan, but yeah, we can determine how many people We want to raise raise money from so a thousand people Oh, no, so in this case we charging each crystal a thousand Rand So it'll be three thousand Rand per person and a company can do a little social media campaign Raise awareness tell people in their shops. So it should be quite a fun way to get people to buy in and It is almost working like a bit like a loyalty program So I've even added something here where companies have issued loyalty programs in the past get a little bit of a benefit so you could say that there's a 10% increase in sales due to Due to the the securitization and you can see then that very comfortably puts Crystallization as the most the highest profit generating and the best option for as terms of bank balance and you can see as far as repayment so you're raising three million from the people and You're the company is only paying back 3,120,000 so it's very very cheap for the business It's very very rewarding for the investor But like I said, the only con or drawback is that you are receiving your your Your return in this cryptocurrency that can only be exchanged for one product Whereas in the others you are receiving cash Which you can use to buy other products. So if you love beer and You then then this is like the best method to go for and that's well under these conditions The best option you can see is crystallization and I've also put the second best as equity I mean if we had to change these these amounts Coin redemption just affects liquidity. Well, sorry. Yeah, the liquidity of the profit. So the idea is that People aren't gonna, you know, it takes time for them to generate that beer token They only get it and you sell one beer It's only after you sell a thousand beers that those beer tokens become activated or able to be redeemed and What we can do is I mean if we change this amount To say a hundred percent you can see it's just changing. So this is All the beer sold in the first year are redeemed and you get no profit and you can see that could have Bad cash flow problem. So it is something to consider is that Crystallization might give you a little bit of cash flow problems in the beginning But you could make the assumption that everyone's not going to redeem their coins straight away They might just redeem say 50% or we could even be quite conservative and say go with 75% And this way you're still receiving money in the beginning So you're still receiving enough money for petty cash and stuff But you can see it right at the beginning it does have a little bit of a drain So that is one thing you do want to consider as well But that's up for the business. So what the model is designed to do is to you have a bunch of inputs you put in your your assumptions you put in your data it goes through this little Excel sheet and Once all these values have been calculated it generates a nice pretty looking graph to display the output Gives a more detailed explanation over here and then comes up with its conclusion of what it recommends Although remember models always come with a disclaimer. I mean, this is a deterministic model. It does not capture volatility That's just for simplicity reasons So remember not to always take a model to be like oh the model said crystallization is the best and then go Crystallization and you you know your company could burn Okay, I don't think it would burn, but you know something bad happens to it Just use the model to age your decision and don't treat it like a you know like gospel that this is the truth Always consult financial professionals and all that other stuff remember does come with a disclaimer But y'all that is that is the model I know crystallization it might be you might have heard that and been like what on earth was I talking about like I said It is something that you only learn post-grad actuarial science if you specializing in finance It is very intense if you want to read up more about it. There's something called Securitization which works It's it's similar. It's not exactly the same, but it's it's similar You can check up securitization But that is the model in a nutshell like I said check up episode one two and three To see a more focus on the self-funding the loan and the equity But sure otherwise that is the end of this video. Thanks for watching till the end Let me know your thoughts in the comment section below and stay subscribed as I'll be releasing more Models and cryptocurrency talks and study videos and all that other cool stuff So otherwise enjoy the rest of your evening. Cheers