WEBVTT 1 00:00:00.800 --> 00:00:03.800 Welcome to this third module in 2 00:00:03.800 --> 00:00:07.400 the course, which is devoted to financial accounting for 3 00:00:06.400 --> 00:00:09.500 as a support to business 4 00:00:09.500 --> 00:00:10.200 operations. 5 00:00:11.100 --> 00:00:14.700 You remember the first two modules with developed a 6 00:00:14.700 --> 00:00:16.800 set of skills of competences? 7 00:00:17.700 --> 00:00:21.100 Module 1 understand how you build 8 00:00:20.100 --> 00:00:23.700 the profit revenues Minus cost 9 00:00:23.700 --> 00:00:25.800 but cost of goods sold. 10 00:00:26.500 --> 00:00:29.200 We also understood why cash differs from 11 00:00:29.200 --> 00:00:32.500 profit, which is absolutely fundamental. It 12 00:00:32.500 --> 00:00:35.500 was a working capital requirement and we'll see 13 00:00:35.500 --> 00:00:38.800 layers that there are plenty of other reasons why cash and 14 00:00:38.800 --> 00:00:40.600 profits are absolutely different. 15 00:00:41.500 --> 00:00:44.500 I progressively told you how to build 16 00:00:44.500 --> 00:00:47.900 the three fundamental documents the very 17 00:00:47.900 --> 00:00:51.200 famous income statement p&l revenues 18 00:00:50.200 --> 00:00:53.600 Minus cost transforming Commercial 19 00:00:53.600 --> 00:00:56.500 Success into profit attributable to 20 00:00:56.500 --> 00:00:59.800 the shareholders. We also discussed cash, 21 00:00:59.800 --> 00:01:03.000 which is you remember different from profit cash 22 00:01:02.100 --> 00:01:05.500 budget cash forecast cash 23 00:01:05.500 --> 00:01:08.600 planning how you generate cash During 24 00:01:08.600 --> 00:01:09.400 the period 25 00:01:10.300 --> 00:01:13.200 and house is his transformed into a picture at the 26 00:01:13.200 --> 00:01:17.200 end of the period which is a balancy assets equity 27 00:01:16.200 --> 00:01:18.000 and liabilities. 28 00:01:19.300 --> 00:01:22.900 During his first module. I also introduced the first concept of 29 00:01:22.900 --> 00:01:25.700 financial accounting but also financial 30 00:01:25.700 --> 00:01:28.500 analysis interpreting the figures 31 00:01:28.500 --> 00:01:31.400 among the first critical concepts of financial 32 00:01:31.400 --> 00:01:34.700 accounting working capital requirement, which 33 00:01:34.700 --> 00:01:37.800 is basically inventories plus receivables minus 34 00:01:37.800 --> 00:01:41.500 payables and transforming profit Into 35 00:01:40.500 --> 00:01:43.100 Cash which is funds from 36 00:01:43.100 --> 00:01:46.800 operations, which obviously mobilizes the working capital 37 00:01:46.800 --> 00:01:47.900 requirement change. 38 00:01:48.800 --> 00:01:51.600 There were significant less New Concept 39 00:01:51.600 --> 00:01:54.600 in the second module. Of course. I started 40 00:01:54.600 --> 00:01:57.500 with the introduction of the difference between a current profit 41 00:01:57.500 --> 00:01:59.500 and the exceptional profit. 42 00:02:00.300 --> 00:02:03.300 Now once you understood the difference, it's important 43 00:02:03.300 --> 00:02:06.800 to be able to build a financial statements and calculate the 44 00:02:06.800 --> 00:02:09.700 current funds from operations which differs 45 00:02:09.700 --> 00:02:12.800 from the global funds from operations with plenty 46 00:02:12.800 --> 00:02:15.300 of consequences in terms of kpis on 47 00:02:15.300 --> 00:02:16.400 performance analysis. 48 00:02:17.100 --> 00:02:20.200 But there was something very important in this module which is 49 00:02:20.200 --> 00:02:23.800 to make you understand that growth consumes financial 50 00:02:23.800 --> 00:02:26.100 resources. And this is 51 00:02:26.100 --> 00:02:29.700 something which I will repeat over the modules across 52 00:02:29.700 --> 00:02:32.500 the course. This is absolutely fundamental to 53 00:02:32.500 --> 00:02:35.600 keep that in mind. We also made some progresses 54 00:02:35.600 --> 00:02:39.100 in the interpretation of figures financial analysis 55 00:02:38.100 --> 00:02:42.000 kpis performance evaluation, 56 00:02:41.100 --> 00:02:45.100 but also the relevance of the kpis trying 57 00:02:44.100 --> 00:02:47.400 to avoid perverse effects of 58 00:02:47.400 --> 00:02:48.200 kpis. 59 00:02:48.900 --> 00:02:51.800 Last but not least. We have started considering 60 00:02:51.800 --> 00:02:54.700 preparing the firm to grow and to 61 00:02:54.700 --> 00:02:57.400 investment which is the acquisition of a machine. 62 00:02:58.100 --> 00:03:01.300 Now we start the third modules. This module is very 63 00:03:01.300 --> 00:03:04.200 important and it's a really turning point 64 00:03:04.200 --> 00:03:07.600 in the pedagogy of this financial accounting course, 65 00:03:07.600 --> 00:03:10.600 the first two modules allowed us 66 00:03:10.600 --> 00:03:13.800 to present the development of a simple retail distribution 67 00:03:13.800 --> 00:03:14.600 activity. 68 00:03:15.300 --> 00:03:18.500 We introduce Concepts in accounting and financial 69 00:03:18.500 --> 00:03:21.800 analysis, but there was no manufacturing we buy 70 00:03:21.800 --> 00:03:23.600 to resell it's quite simple. 71 00:03:24.400 --> 00:03:27.700 But this model quickly showed its limits 72 00:03:27.700 --> 00:03:31.000 you remember we know that an operational constraint. 73 00:03:30.300 --> 00:03:34.100 I'll supplier has no sufficient capacity 74 00:03:33.100 --> 00:03:36.700 to serve and we have to build up 75 00:03:36.700 --> 00:03:39.300 inventories in order to prepare the company 76 00:03:39.300 --> 00:03:42.200 for the end of your celebrations. Then we have 77 00:03:42.200 --> 00:03:45.700 to buy more than what we need. We create in 78 00:03:45.700 --> 00:03:49.100 factories and unfortunately part of this inventories 79 00:03:48.100 --> 00:03:51.500 will have to be depreciated. This will 80 00:03:51.500 --> 00:03:54.700 be the exceptional result exceptional loss 81 00:03:54.700 --> 00:03:55.500 in January. 82 00:03:56.200 --> 00:03:59.500 Then you understand that we have to develop the project to better 83 00:03:59.500 --> 00:04:02.800 control our supply and produce a 84 00:04:02.800 --> 00:04:04.500 puzzles by ourselves. 85 00:04:05.200 --> 00:04:08.200 We carried out some studies in March and 86 00:04:08.200 --> 00:04:12.100 now we're faced with an investment project by a 87 00:04:11.100 --> 00:04:14.600 machine in order to control our growth 88 00:04:14.600 --> 00:04:16.800 to control our supply chain. 89 00:04:17.900 --> 00:04:21.400 But indeed we'll have to include very 90 00:04:20.400 --> 00:04:23.600 important new element the financing 91 00:04:23.600 --> 00:04:24.300 of the project. 92 00:04:25.400 --> 00:04:28.400 So far until now Capital initial Capital 93 00:04:28.400 --> 00:04:31.900 retain earnings accumulated reinvested 94 00:04:31.900 --> 00:04:34.200 profit were sufficient to finance the 95 00:04:34.200 --> 00:04:37.700 development of the operations in reality the 96 00:04:37.700 --> 00:04:41.000 increase in the working capital requirement. The accounts 97 00:04:40.300 --> 00:04:44.100 receivable. The inventor is the operating current 98 00:04:43.100 --> 00:04:47.000 Assets Now making an industrial investment 99 00:04:46.100 --> 00:04:50.100 represents a much more significant 100 00:04:49.100 --> 00:04:53.100 cash outflow. The accumulated 101 00:04:52.100 --> 00:04:55.400 cash we have in our bank account is not 102 00:04:55.400 --> 00:04:58.100 high enough to pay for the machine. 103 00:04:59.600 --> 00:05:02.900 Now there are two Alternatives shareholders or financial 104 00:05:02.900 --> 00:05:05.400 creators. But if the shareholders it do 105 00:05:05.400 --> 00:05:08.500 not wish to contribute to the financing no other 106 00:05:08.500 --> 00:05:11.700 alternative than mobilize the financial creators 107 00:05:11.700 --> 00:05:14.500 in this case. I selected a bank. 108 00:05:15.300 --> 00:05:18.400 Now the financial performance of this investment. 109 00:05:18.400 --> 00:05:21.700 It's integration into the firm's Financial 110 00:05:21.700 --> 00:05:24.600 accounts. And the impact on its 111 00:05:24.600 --> 00:05:27.200 Financial equilibrium are the main 112 00:05:27.200 --> 00:05:29.400 axis of this module. 113 00:05:30.200 --> 00:05:34.000 Let me deep dive a minute in a technical objectives of 114 00:05:33.300 --> 00:05:34.900 this module now. 115 00:05:35.800 --> 00:05:38.800 You will understand the financial economics of 116 00:05:38.800 --> 00:05:41.900 an investment the cost of the machine the capacity 117 00:05:41.900 --> 00:05:45.200 how many people we need Staffing in 118 00:05:45.200 --> 00:05:46.500 duration and so on. 119 00:05:47.200 --> 00:05:50.900 I will also tell you how to calculate production costs. 120 00:05:50.900 --> 00:05:53.600 Oh, it was quite simple you buy and 121 00:05:53.600 --> 00:05:56.300 sell it's a purchasing price now, it's much more complex. 122 00:05:57.200 --> 00:06:00.000 And in the calculation of the production cost I will 123 00:06:00.200 --> 00:06:03.800 have to introduce the depreciation of the machine. I 124 00:06:03.800 --> 00:06:06.100 will tell you how to calculate it and how to 125 00:06:06.100 --> 00:06:08.900 introduce that in the account of the company. 126 00:06:09.600 --> 00:06:12.500 A very important acronym very 127 00:06:12.500 --> 00:06:15.900 well-known of any Corporation worldwide is a 128 00:06:15.900 --> 00:06:19.000 bit dark earnings before interest taxes 129 00:06:18.800 --> 00:06:22.100 deprecision on amortization. Why is 130 00:06:21.100 --> 00:06:24.400 it so important? They bidder which is this 131 00:06:24.400 --> 00:06:28.000 potential cash generated by the business operations are not 132 00:06:27.200 --> 00:06:29.200 exactly the actual cash. 133 00:06:29.800 --> 00:06:32.200 Now a bit that transform into cash will 134 00:06:32.200 --> 00:06:35.500 be operating cash flow and I will also introduce a 135 00:06:35.500 --> 00:06:38.900 concept of free cash flow which is slightly different 136 00:06:38.900 --> 00:06:42.600 because it takes into account Capital expenditures. Remember 137 00:06:41.600 --> 00:06:44.400 what I just said, there will 138 00:06:44.400 --> 00:06:47.100 be some debt to find on the machine. So there will be the 139 00:06:47.100 --> 00:06:50.800 appearance of the financial debt in the balance say and when 140 00:06:50.800 --> 00:06:53.200 you have some Financial that you have to pay the interest 141 00:06:53.200 --> 00:06:56.300 to the bank, how do you account for the interest 142 00:06:56.300 --> 00:06:59.500 expense? Where do you position the interest expense in 143 00:06:59.500 --> 00:07:02.500 the financial documents? It's part of the objectives of 144 00:07:02.500 --> 00:07:05.500 this third module. But what is very important 145 00:07:05.500 --> 00:07:08.200 is at the end of the module you will know 146 00:07:08.200 --> 00:07:11.500 everything you need to know to build a 147 00:07:11.500 --> 00:07:14.800 business plan. Of course, it is a simple 148 00:07:14.800 --> 00:07:17.800 business plan, but you will have all the structural 149 00:07:17.800 --> 00:07:20.200 knowledge, which you need to put 150 00:07:20.200 --> 00:07:23.800 some Financial economics into a business plan which consists 151 00:07:23.800 --> 00:07:25.000 in making a company grow. 152 00:07:25.800 --> 00:07:28.200 Now as a structure will be quite the same. 153 00:07:28.800 --> 00:07:31.100 There will be first a presentation of the 154 00:07:31.100 --> 00:07:34.400 investment project The Proposal which 155 00:07:34.400 --> 00:07:35.600 is made to buy the machine. 156 00:07:36.400 --> 00:07:39.900 Then we'll run the company months after month in April. 157 00:07:39.900 --> 00:07:42.000 We'll progressively stop buying the 158 00:07:42.700 --> 00:07:45.400 puzzles from the supplier and manufacture them 159 00:07:45.400 --> 00:07:48.700 by ourselves. Then we'll develop production on 160 00:07:48.700 --> 00:07:51.700 sales in May and June each and 161 00:07:51.700 --> 00:07:54.300 every month. I will propose you a monthly 162 00:07:54.300 --> 00:07:57.700 financial analysis, but as these 163 00:07:57.700 --> 00:08:00.700 module is very important. And this 164 00:08:00.700 --> 00:08:04.200 is the end of the first cycle in the course. I 165 00:08:03.200 --> 00:08:06.600 will propose you progress report after 166 00:08:06.600 --> 00:08:09.000 these three modules so that you have 167 00:08:09.200 --> 00:08:12.600 a kind of three module wrap up to keep on 168 00:08:12.600 --> 00:08:15.000 progressing in the financial accounting. 169 00:08:15.900 --> 00:08:19.600 Tools same story presentation slides 170 00:08:18.600 --> 00:08:22.000 and audio the spreadsheet 171 00:08:21.200 --> 00:08:24.400 which you are going to use and observe in 172 00:08:24.400 --> 00:08:27.300 parallel and there will be a test at the end of the 173 00:08:27.300 --> 00:08:30.700 module so that you understand if you really master 174 00:08:30.700 --> 00:08:33.300 all the competences which are developed in 175 00:08:33.300 --> 00:08:37.000 this module under the previous modules as well. Now we 176 00:08:36.200 --> 00:08:39.600 are ready to start with the analysis of 177 00:08:39.600 --> 00:08:41.200 our investment project.