[MUSIC] Hello and welcome back to the third week of Operational Finance. Today we're going to keep using the case Polypanel to build on several financial concepts that will help us make better decisions in our businesses. Now, the outline of today, that we're going to be using, is first, we're going to do a brief recap of last week. Where we're going to just have a quick look at what we did, so that we start from where we left it last week. Second, we're going to look at the diagnosis of the problem. We'll start understanding diagnosis means what is the problem. If you go to the doctor you want to know what happens, why am I sick? Why is this company sick? Between the first diagnosis part and the second diagnosis part, what we're going to we do is introduce some consents that are the NFO, Need of Funds for Operations and Working Capital. Because they will have first better understand the diagnosis and better address the action plan. After that explanation, we will keep on the diagnosis and then we will move on to the action plan, like what do we do, now that we know what is happening, let's see what we do. And then in the end, what we will do is explain what sustainable growth means, and we will close with a brief recap. So let's start with the recap from week two. Now as you remember, there were three main things that we saw last week. There were many bullet points, I agree, but they're were basically three points that we looked at. The first one was, tried to understand why current assets actually changed. Do you remember that we did basically, we looked at the balance sheets and we looked at what happened over the last year and what happened over four years ago. And we saw that there was a big difference in between, right. As you can see here, in the column we call sources and uses of funds, where you take the difference between the year 2007 and the year 2004. Now what we saw is that assets and liabilities almost tripled, and we wanted to understand why such a big increase. Specifically, we were to look at receivables, as I reference, because inventory changed as well, and many other items change as well. Well, we'll see why did receivables increase so much. Well, it seems like a very simple question, right? But it is very specific and it's not that simple, in a sense that there are two reasons, why these two items, these two different amount actually change. The first one is that the company grows in sales, so if you sell more, you have more influences. But the second one is that you maybe collecting worse. You could have the same level of sales, but if you collect worse you'll receivables will pile up, right? So to understand what is the source of that increase, we needed to do the operational ratios. So this is the first thing we do, what is the days of collection? By operational ratios we meant the days of collection, payment, and inventory that will help understand what our policies, in terms of what our relationships with customers and the suppliers. Now with days of collection, you would agree with me that we said, it's basically the amount of days I take to receive the money from my customers, or the amount of days that my customers take to pay me. And the formula was very simple. Days of collection was basically we're having receivables over daily sales. Now for days of inventory was something pretty similar, but the definitions here are a little different, right? So with the days of inventory, basically the number of days I take to sell my inventory. And again, the formula was very similar to the first one. It's basically days of inventory is the amount I have in inventory over the daily COGS. Note that is not daily sales, now it's daily COGS, because what we have in the inventory is priced at the COGS price. Now, what are days of payment was basically the amount of days that I take to pay my suppliers. So the later I pay my suppliers The more free financing that we have right. The formula again is very similar. It's the amount of the days of payable of days of payment would be what I have in payables over the daily purchases. [MUSIC]
