[ Gentle music plays ] As I mentioned at the beginning, so to understand supply chain finance it's also important to understand the concept of of working capital. So just a brief overview, so basically working capital measures the efficiency of how company manage its short term financial health or short term liquidity and it's basically the way with your short term liquidity how you pay for your shirt-- short term liability and in terms of formula it's very simple. It's your current assets minus your current liabilities and the rest means like how healthy you are, how much liquid you have available to pay for your short term liabilities and on average a good ratio a good ratio is between 1.2 to 2 that's a healthy ratio which is considered in the market. Now let me show that on the board first, there are other concepts which I will explain further in today's session in terms of working capital. So let me show you a timeline. So basically if you are a corporate buyer okay, you order a product. So you send over a purchase order to your supplier, correct? Then you receive the inventory you receive the goods in your warehouse okay, and then you sell it to your clients, and of course, in most cases it's not like a retailer where you're sell it and you you receive you cash suddenly, so it takes a prime period until you receive your payment, correct? So this period from here to here is called inventory days basically it means how long the goods are in the warehouse, and of course, if you for example if you manufacture beer and you have beer in your warehouse this is liquidity this is cash which is is in your warehouse is working capital which you cannot use okay. Then the period between the period between you book a sales on on your balance sheet and you receive the actual payment it's called payable days or DPO, so basically how long no sorry sorry receivable days and DSO basically measures how effective you are in terms of collection of your payment. Do you need to wait 30 days or you need to wait you need to wait like 10 days to get the payment, and of course, every day you have to wait it means that you don't have enough cash on your balance sheet to pay your cost in terms of rent in terms of employees in terms of R&D. So that's a very important measures which analysts are looking at, but then of course you also have to pay your your supplier. So let's say you receive the invoice kind of with your with your here okay you receive the invoice from your supplier before you receive it on your warehouse and you pay your supplier, let's say here. So this period is called the payables days or DPO and this difference is called the cash to cash cycle or cash conversion cycle and here you have it again as a graphic which is nicer than what I put on the whiteboard and the key point is to reduce that. The key point is, of course, to reduce your collection days to get paid earlier, having a small inventory and paying your suppliers later, but you cannot see that in in a single view because, of course, if you have no inventory and you have a big order then you cannot fulfill this order. So you always need a specific amount of inventory and every industry is different or you cannot just pay your suppliers indefinitely because then you will lose your supplies. So it's a it's very important measure how to basically improve and optimize all these three different parts, but going forward the key measurements which we're looking is DSO the DPO and the cash to cash cycle and to show you an example because you can see like okay that's that's just a formula but this is an example of Dell, so I'm sure you remember Dell when they introduced I think it was in the in the late 90s the the order to manufacturing, so basically you ordered something as a client and only then they they build the computers. So that means they're their inventory days was was it was very very low and this was a totally new concept compared to their competitors and it's why you see here the cash conversion cycle actually went negative and in some cases this has a positive influence on some companies depending in which industry. It's just an example where you see here the key point why it went negative is because the inventory days was basically they had almost no no more inventory. I think they they basically is I mean after Dell all the other IT companies kind of copied the concept like today if you if you buy from Apple like an iPad nothing nothing is manufactured from from Apple. I mean they buy the goods from Samsung, the batteries from I don't know the the chip and they give it to Foxconn or any kind of Chinese manufacturer. They build it they even package it. Apple is just providing R&D marketing so that's that's just an one example to show the impact of working capital management.
