WEBVTT 1 00:00:00.100 --> 00:00:03.900 Welcome to this first month of the Saigon module 2 00:00:03.900 --> 00:00:06.100 prepare for growth. We are going 3 00:00:06.100 --> 00:00:09.600 to start in January's and explore February and March 4 00:00:09.600 --> 00:00:12.300 and in January, it will be some bad news 5 00:00:12.300 --> 00:00:15.200 a bad surprise some loss on 6 00:00:15.200 --> 00:00:18.000 inventories. What is happening during this month? 7 00:00:18.800 --> 00:00:21.700 As we anticipate that we are going to sell one thousand 8 00:00:21.700 --> 00:00:25.200 units evenly distributed 500 9 00:00:24.200 --> 00:00:27.500 for b2c 500 for B2B 10 00:00:27.500 --> 00:00:30.300 and the actual sales are going to be exactly the same 11 00:00:30.300 --> 00:00:33.700 as expected sales. This is quite good news, but we 12 00:00:33.700 --> 00:00:36.300 are going to purchase only 800 units and 13 00:00:36.300 --> 00:00:39.500 not 1,000 units for a very simple reason. We have 14 00:00:39.500 --> 00:00:42.200 some inventories at the end of the sample. It's about 15 00:00:42.200 --> 00:00:45.200 six and red units so we don't need 16 00:00:45.200 --> 00:00:48.100 to buy as many units as what we are going to 17 00:00:48.100 --> 00:00:51.200 sell in January, but there's some bad news. 18 00:00:51.200 --> 00:00:55.300 The bad news is that out of 600 units 400 19 00:00:54.300 --> 00:00:57.400 are sellable. There will be a market will 20 00:00:57.400 --> 00:01:00.500 find a customer for that. And for any reason 21 00:01:00.500 --> 00:01:03.900 200 units are not going to be able to be sold. 22 00:01:03.900 --> 00:01:06.600 There will be no Market no buyer for 23 00:01:06.600 --> 00:01:07.100 this 200. 24 00:01:08.400 --> 00:01:11.700 If you're an attack business, the reason might be obsolescence if 25 00:01:11.700 --> 00:01:14.300 you are on the fashioned business, it might be it's 26 00:01:14.300 --> 00:01:18.000 no more up to date. Whatever. The reason these 27 00:01:17.400 --> 00:01:20.800 200. I've absolutely no value anymore. 28 00:01:20.800 --> 00:01:23.600 But you purchase them for $20 29 00:01:23.600 --> 00:01:27.400 each 200 times 20. It's 4,000. 30 00:01:26.400 --> 00:01:29.900 Then there will be an expense a 31 00:01:29.900 --> 00:01:32.500 conception a usage which is exceptional because 32 00:01:32.500 --> 00:01:35.700 of course it's not in your mission statement to 33 00:01:35.700 --> 00:01:38.000 a right of some inventories, but there will be 34 00:01:38.600 --> 00:01:40.800 the accounting for inventory depreciation. 35 00:01:41.800 --> 00:01:44.500 Now this leads to the first concept of this 36 00:01:44.500 --> 00:01:48.200 month of January, which is current versus exceptional 37 00:01:47.200 --> 00:01:50.900 profit or loss current 38 00:01:50.900 --> 00:01:53.200 means, it's normal. It's recurrence part of 39 00:01:53.200 --> 00:01:56.400 your mission statement its business as usual. It's your normal 40 00:01:56.400 --> 00:01:59.400 business operations an exceptional means the 41 00:01:59.400 --> 00:02:02.200 other way around it's an accident and at least 42 00:02:02.200 --> 00:02:05.700 in Siri, it should not be repeated in the future. It 43 00:02:05.700 --> 00:02:08.900 might be bad news such as inventory depreciation. 44 00:02:08.900 --> 00:02:11.000 The one I describing it can be 45 00:02:11.400 --> 00:02:14.500 a loss of value or non-current assets intangible assets. 46 00:02:14.500 --> 00:02:17.300 For example, you're right of a Goodwill 47 00:02:17.300 --> 00:02:20.100 or brand in the impairment process as a 48 00:02:20.100 --> 00:02:23.300 consequence of an acquisition, but it might be good news 49 00:02:23.300 --> 00:02:26.600 as well. Maybe you sell your head office. Maybe you sell a 50 00:02:26.600 --> 00:02:29.800 premise somewhere you generate a capital gain and 51 00:02:29.800 --> 00:02:33.000 at the end of the day, it's an exceptional profit. You 52 00:02:32.200 --> 00:02:36.000 don't sell the premise twice. It 53 00:02:35.100 --> 00:02:37.700 should not be repeated in the future. 54 00:02:38.600 --> 00:02:41.900 Now for the investor for the financial analyst what 55 00:02:41.900 --> 00:02:44.800 is really at stake is the future of the company. This 56 00:02:44.800 --> 00:02:47.800 is why companies report a current 57 00:02:47.800 --> 00:02:51.300 profit an adjusted profit, excluding 58 00:02:50.300 --> 00:02:53.700 all the exceptional items, but 59 00:02:53.700 --> 00:02:56.800 for the shareholders, the future is obviously important, 60 00:02:56.800 --> 00:02:59.400 but it's also quite relevant to understand 61 00:02:59.400 --> 00:03:02.100 the global profit generated by The Firm 62 00:03:02.100 --> 00:03:05.800 including current and non-carat and exceptional 63 00:03:05.800 --> 00:03:08.400 items because it's about the quality of 64 00:03:08.400 --> 00:03:12.100 decisions, which we are taking in the past. Now, 65 00:03:11.100 --> 00:03:14.800 we are going to add a line in the p&l which 66 00:03:14.800 --> 00:03:17.600 is exceptional loss loss on 67 00:03:17.600 --> 00:03:20.600 inventories 200 units 20 68 00:03:20.600 --> 00:03:23.700 dollars 4,000. It's going to be an exceptional 69 00:03:23.700 --> 00:03:24.200 loss. 70 00:03:25.100 --> 00:03:28.800 As a consequence of that we can account for the inventories you 71 00:03:28.800 --> 00:03:30.700 remember units and value. 72 00:03:31.200 --> 00:03:34.200 Units we had 600 units at the beginning 73 00:03:34.200 --> 00:03:37.200 of the month and we purchase 800 of 74 00:03:37.200 --> 00:03:40.500 them. So what is available for sale or consumption is 75 00:03:40.500 --> 00:03:43.700 1,400 units. We actually consume 76 00:03:43.700 --> 00:03:46.700 1,200 units 1,000 of 77 00:03:46.700 --> 00:03:49.800 them is for sales generating revenues and 78 00:03:49.800 --> 00:03:52.300 200 is about depreciation. It's about 79 00:03:52.300 --> 00:03:55.600 consuming something whose value is Neil how many 80 00:03:55.600 --> 00:03:58.000 units are left in the inventory at the end 81 00:03:58.200 --> 00:04:01.900 of the period 200. This is obvious you replace 82 00:04:01.900 --> 00:04:04.700 that by values multiplying all these items 83 00:04:04.700 --> 00:04:07.500 by 20 dollars. The value of the inventor 84 00:04:07.500 --> 00:04:11.000 is at the beginning of the period walls 12,000 you purchase 85 00:04:10.700 --> 00:04:14.400 800 multiplied by 20 and you're 86 00:04:13.400 --> 00:04:16.300 right of 20,000 + 87 00:04:16.300 --> 00:04:19.300 4,000 is going to be the cost of 88 00:04:19.300 --> 00:04:22.200 goods sold and four thousand is 89 00:04:22.200 --> 00:04:25.600 going to be the exceptional loss the value of your inventories at 90 00:04:25.600 --> 00:04:28.800 the end of the period is 4,000 200 units. 91 00:04:29.400 --> 00:04:32.200 Now you can start building your p&l. It starts 92 00:04:32.200 --> 00:04:36.400 with revenues 500 units B2B 500 93 00:04:35.400 --> 00:04:39.800 units b2c. 27,500 cost 94 00:04:39.800 --> 00:04:43.800 of sales. You remember the previous slide 20,000 95 00:04:42.800 --> 00:04:45.800 gross margin minus 96 00:04:45.800 --> 00:04:48.900 administrative expense myself and the salesperson. 97 00:04:48.900 --> 00:04:51.900 The current operating profit 98 00:04:51.900 --> 00:04:54.600 is 4,200 and the 99 00:04:54.600 --> 00:04:57.800 normal circumstances. It should be the operating profit. But 100 00:04:57.800 --> 00:05:00.700 there is an exceptional loss which is a New Concept 101 00:05:00.700 --> 00:05:03.500 in this month of January and it's going to cost us 102 00:05:03.500 --> 00:05:06.400 4,000 at the end of that the earnings before 103 00:05:06.400 --> 00:05:09.900 thanks a taxable income is only 200. 104 00:05:10.500 --> 00:05:13.600 Then I can calculate the tax. The income 105 00:05:13.600 --> 00:05:16.700 tax rate is 20% earnings before tax of 106 00:05:16.700 --> 00:05:19.100 the period 200 the tax, which is going to 107 00:05:19.100 --> 00:05:22.300 be paid is 20% of 200 but it's not 108 00:05:22.300 --> 00:05:25.600 going to be paid immediately. So it's going to show as an 109 00:05:25.600 --> 00:05:28.500 operating liability in the balance it it's going 110 00:05:28.500 --> 00:05:32.000 to be bad maybe in January next year net 111 00:05:31.400 --> 00:05:34.600 earnings 100 and 60. So now 112 00:05:34.600 --> 00:05:37.200 we can complete the p&l. We still have 113 00:05:37.200 --> 00:05:41.600 the growth margin of 7,500 minus indirect 114 00:05:40.600 --> 00:05:43.700 overhead cost Karen operating 115 00:05:43.700 --> 00:05:46.900 profit earnings before tax tax net 116 00:05:46.900 --> 00:05:49.400 earnings 160. The p&l is 117 00:05:49.400 --> 00:05:52.700 completed. The question is what do we do with this net 118 00:05:52.700 --> 00:05:55.400 earnings? And we would like to be quite cautious because 119 00:05:55.400 --> 00:05:58.600 we know that there will be some growth in the future. So we 120 00:05:58.600 --> 00:06:01.800 want to retain as much cash as possible and 121 00:06:01.800 --> 00:06:04.600 the lesson decision of paying or not 122 00:06:04.600 --> 00:06:07.500 a dividend to the end of the year. So we decide 123 00:06:07.500 --> 00:06:10.400 to declare absolutely no dividend for this period and 124 00:06:10.500 --> 00:06:14.000 And we retain when 100% of the 125 00:06:13.400 --> 00:06:16.800 income generated by the company in January. 126 00:06:16.800 --> 00:06:19.400 So the retained earnings at the end of January will 127 00:06:19.400 --> 00:06:23.200 be the retained earnings at the end of December plus 128 00:06:22.200 --> 00:06:25.200 the earnings generated by 129 00:06:25.200 --> 00:06:28.400 the company in January. You remember that there was 130 00:06:28.400 --> 00:06:31.800 a dividend which was accounted in December showing as 131 00:06:31.800 --> 00:06:34.500 an operating liability, which is going to be paid 132 00:06:34.500 --> 00:06:37.400 in January. We'll see that in a cash flow statement. 133 00:06:38.400 --> 00:06:41.700 Now we are ready to build a cash budget to evaluate the 134 00:06:41.700 --> 00:06:44.600 change in a cash position of the company. There will 135 00:06:44.600 --> 00:06:47.800 be some cash collection from sales and there 136 00:06:47.800 --> 00:06:50.300 will be some Karen cash outlays. 137 00:06:50.700 --> 00:06:53.300 You remember that we pair the income tax 138 00:06:53.300 --> 00:06:56.400 generated by The Profit. We were generating 139 00:06:56.400 --> 00:06:59.400 a year before we decided in December to 140 00:06:59.400 --> 00:07:02.100 pay dividend. It's going to be paid in January and it's going 141 00:07:02.100 --> 00:07:05.700 to show in the cash budget. But as far as the exceptional 142 00:07:05.700 --> 00:07:09.000 loss is concerned. It's strictly accounting. There's 143 00:07:08.300 --> 00:07:11.400 no cash. Outlay. We just 144 00:07:11.400 --> 00:07:14.500 figure out that something which was worth four thousand in 145 00:07:14.500 --> 00:07:17.400 the books is in fact worth noting but there's no 146 00:07:17.400 --> 00:07:20.300 impact in a cash budget. It is in the 147 00:07:20.300 --> 00:07:23.300 piano. Obviously, it generates. No cash outlay. 148 00:07:24.300 --> 00:07:27.500 Now we can start building our cash budget our cash 149 00:07:27.500 --> 00:07:30.700 forecast for the month. You remember accounts receivable. 150 00:07:30.700 --> 00:07:34.100 It's about beginning of the period the 151 00:07:33.100 --> 00:07:36.200 B2B sales of 152 00:07:36.200 --> 00:07:40.800 December. We generate revenues of 27,500. So 153 00:07:40.800 --> 00:07:45.400 what is due by our customers is 42,500. 154 00:07:46.300 --> 00:07:49.600 And at the end of the day what's going to happen we cash in 155 00:07:49.600 --> 00:07:52.800 what was you at the end of December and we cash in 156 00:07:52.800 --> 00:07:55.600 the b2c sales of Jerry. So the 157 00:07:55.600 --> 00:07:58.300 total is 30,000. What is you is in fact 158 00:07:58.300 --> 00:08:01.700 the B2B sales of January at 159 00:08:01.700 --> 00:08:04.400 the end of the period 12,000 500. 160 00:08:05.100 --> 00:08:08.700 Accounts payable beginning of the period you 161 00:08:08.700 --> 00:08:11.600 remember there were plenty of purchases in December. 162 00:08:11.600 --> 00:08:14.700 Now, we have to pay 50% of them in January 163 00:08:14.700 --> 00:08:17.400 purchases 800 times 164 00:08:17.400 --> 00:08:21.400 20, what is due to our suppliers 30,000 165 00:08:20.400 --> 00:08:23.700 in total? But what do we pay in 166 00:08:23.700 --> 00:08:26.300 generate we pay what was due at the 167 00:08:26.300 --> 00:08:29.700 end of December and 50% of the purchases in 168 00:08:29.700 --> 00:08:32.300 January in total. There's a cash 169 00:08:32.300 --> 00:08:35.800 out which is 22,000. What is you is remaining 170 00:08:35.800 --> 00:08:39.000 50% which is going to be paid 30 171 00:08:38.300 --> 00:08:41.100 days later 8,000 now 172 00:08:41.100 --> 00:08:44.300 we can build our cash budget cash from sales 173 00:08:44.300 --> 00:08:47.300 is b2c sales in January and 174 00:08:47.300 --> 00:08:51.200 B2B sales in December 30,000. The 175 00:08:50.200 --> 00:08:53.400 most important cash Outlet is 176 00:08:53.400 --> 00:08:56.400 paying the suppliers. You remember 50% of 177 00:08:56.400 --> 00:09:00.000 January purchases and 50% of December purchases 178 00:08:59.100 --> 00:09:02.700 operating liability balance sheet 179 00:09:02.700 --> 00:09:04.800 and of December myself. 180 00:09:05.200 --> 00:09:08.900 Administration the salesperson and we 181 00:09:08.900 --> 00:09:12.800 pay the taxes of 2,680 which 182 00:09:12.800 --> 00:09:16.000 were calculated at the end of December. We 183 00:09:15.300 --> 00:09:19.100 also pay the dividend which was decided by 184 00:09:18.100 --> 00:09:21.200 the shareholders at the 185 00:09:21.200 --> 00:09:25.500 function of the net earnings generated by the company total 186 00:09:24.500 --> 00:09:27.400 outlay is about the same 187 00:09:27.400 --> 00:09:30.200 as total inflow and at the 188 00:09:30.200 --> 00:09:33.700 end of the day, there's a minor change in cash position of plus 189 00:09:33.700 --> 00:09:36.200 20 the cash situation at the 190 00:09:36.200 --> 00:09:39.100 beginning of the period was 10,400 at the end of the 191 00:09:39.100 --> 00:09:42.100 Paris 10,400 and 20 and then we 192 00:09:42.100 --> 00:09:43.400 can build the balance sheet. 193 00:09:44.100 --> 00:09:47.500 Inventories what remains is 200 units 194 00:09:47.500 --> 00:09:51.200 at twenty dollars accounts receivable B2B 195 00:09:50.200 --> 00:09:53.800 sales in January cash. We just 196 00:09:53.800 --> 00:09:59.100 calculated total assets. 26,920 Capital 197 00:09:58.100 --> 00:10:01.900 no share issue 10,000. 198 00:10:02.500 --> 00:10:05.900 Retained earnings at the end of January. It's retained earnings 199 00:10:05.900 --> 00:10:08.400 at the end of December plus 100% of 200 00:10:08.400 --> 00:10:11.800 the net earnings generated by the company generate dividends 201 00:10:11.800 --> 00:10:15.000 payable is zero because you remember that we decided a 202 00:10:14.400 --> 00:10:17.600 dividend at the end of December which showed as an operating 203 00:10:17.600 --> 00:10:20.600 liability. We've had the dividend and we 204 00:10:20.600 --> 00:10:23.600 decided to reinvest 100% of the earnings of 205 00:10:23.600 --> 00:10:25.000 January so far. 206 00:10:25.700 --> 00:10:29.300 Accounts payable 50% of the purchases of 207 00:10:28.300 --> 00:10:31.200 generate and income tax 208 00:10:31.200 --> 00:10:34.700 payable. We pay the tax which was due now 209 00:10:34.700 --> 00:10:37.500 we have to accrue for an additional income tax 210 00:10:37.500 --> 00:10:40.500 people which is 20% of 200 you remember 211 00:10:40.500 --> 00:10:43.700 it's 40 and a good news as usual these 212 00:10:43.700 --> 00:10:47.000 ads total equity and liabilities match with 213 00:10:46.100 --> 00:10:49.400 the total asset. Now, let's move to the second 214 00:10:49.400 --> 00:10:53.300 part, which is about a little bit of financial analysis sales 215 00:10:52.300 --> 00:10:55.500 profit and cash. 216 00:10:56.300 --> 00:10:59.400 Sales, we have some bad news in January. If 217 00:10:59.400 --> 00:11:02.400 you just look at the graph you're going to say what is happening to 218 00:11:02.400 --> 00:11:05.700 the company. Well, the is simple interpretation 219 00:11:05.700 --> 00:11:08.500 is that we are in a seasonal business. So what 220 00:11:08.500 --> 00:11:11.400 we wear anticipating is growth in 221 00:11:11.400 --> 00:11:15.000 sales and revenues in December which happened not as 222 00:11:14.200 --> 00:11:17.400 much as anticipated but injury people 223 00:11:17.400 --> 00:11:20.700 buy less, this is seasonality. There's 224 00:11:20.700 --> 00:11:23.100 no big deal about that. What is 225 00:11:23.100 --> 00:11:27.200 interesting is to observe the impact on the margins on 226 00:11:27.200 --> 00:11:30.700 the operating margins. The gross margin is quite stable 227 00:11:30.700 --> 00:11:33.300 because it's a kind of combination between 228 00:11:33.300 --> 00:11:36.500 B2B and b2c which is relatively stable 229 00:11:36.500 --> 00:11:39.300 from one year to the other. What is more interesting is to 230 00:11:39.300 --> 00:11:41.000 observe what happens with the operating margin? 231 00:11:42.400 --> 00:11:45.500 The operating margin was up in December. Why because the 232 00:11:45.500 --> 00:11:48.400 fixed cost was the same and the revenues were 233 00:11:48.400 --> 00:11:52.300 up. So as a consequence the profit was 234 00:11:52.300 --> 00:11:55.300 up as a percentage to revenues. This is 235 00:11:55.300 --> 00:11:58.900 named economies of scale, but in January as a revenues 236 00:11:58.900 --> 00:12:02.300 are down then the operating profits margin 237 00:12:01.300 --> 00:12:04.900 is lower because it's about these economies 238 00:12:04.900 --> 00:12:07.500 of scale. The fixed costs are fixed is 239 00:12:07.500 --> 00:12:10.200 revenues are up economies of scale if 240 00:12:10.200 --> 00:12:13.100 revenues are down DC economies of scale. 241 00:12:14.100 --> 00:12:17.800 Now what about their working capital requirement generated by 242 00:12:17.800 --> 00:12:20.500 the business operations? It's always inventories Plus 243 00:12:20.500 --> 00:12:24.200 accounts receivable miners accounts payable accounts receivable 244 00:12:24.200 --> 00:12:27.300 and accounts payable not much to say about that. 245 00:12:27.300 --> 00:12:30.300 What about inventories? Well inventories are 246 00:12:30.300 --> 00:12:34.000 divided by three for two reasons one is 247 00:12:33.300 --> 00:12:36.700 because sales are down and the 248 00:12:36.700 --> 00:12:39.800 second reason is that there is a depreciation of the inventory. 249 00:12:40.500 --> 00:12:43.300 Now as an initial analysis, what can we say? 250 00:12:43.300 --> 00:12:46.500 There's a reduction a drop a 251 00:12:46.500 --> 00:12:49.600 decline in sales which reduces the working 252 00:12:49.600 --> 00:12:52.500 capital requirement. And that's quite interesting because 253 00:12:52.500 --> 00:12:55.400 when you reduce a working capital requirement you 254 00:12:55.400 --> 00:12:58.200 increase cash but if sales are down you 255 00:12:58.200 --> 00:13:01.800 generate less economies of skill and you reduce the 256 00:13:01.800 --> 00:13:04.700 operating profit because of the fixed 257 00:13:04.700 --> 00:13:07.200 cost. So you understand that on the one hand 258 00:13:07.200 --> 00:13:10.800 you have a reduction in the sales, which is more cash 259 00:13:10.800 --> 00:13:13.200 but less profit keep that in 260 00:13:13.200 --> 00:13:16.400 mind we'll discuss that a little bit later now, we're ready 261 00:13:16.400 --> 00:13:19.800 to calculate the funds from operations and deduct 262 00:13:19.800 --> 00:13:22.300 from that the change in the cash position of the company. Let's 263 00:13:22.300 --> 00:13:23.500 make a first try. 264 00:13:24.300 --> 00:13:27.400 You remember that the operating working capital requirement at 265 00:13:27.400 --> 00:13:30.800 the end of January is 8,500. 266 00:13:31.500 --> 00:13:34.300 It's down from December. It's down by 267 00:13:34.300 --> 00:13:37.100 4,500. 268 00:13:37.800 --> 00:13:40.500 Now you remember that we have generated a profit of 269 00:13:40.500 --> 00:13:43.200 200. Then you can calculate the funds from 270 00:13:43.200 --> 00:13:46.600 operations, which is taxable income earnings 271 00:13:46.600 --> 00:13:49.400 before tax minus a change in the operating 272 00:13:49.400 --> 00:13:52.200 working capital requirement and we get something which 273 00:13:52.200 --> 00:13:55.200 is 4,700. Then we 274 00:13:55.200 --> 00:13:58.400 deduct a cash Outlet tax payment dividend payment 275 00:13:58.400 --> 00:14:01.800 and we have the change in cash which is 20, but 276 00:14:01.800 --> 00:14:04.900 there is a problem in this presentation because in 277 00:14:04.900 --> 00:14:08.100 a taxable income in the earnings before tax, there's 278 00:14:07.100 --> 00:14:10.300 an exceptional loss. So what 279 00:14:10.300 --> 00:14:13.500 is absolutely right and accurate on accounting 280 00:14:13.500 --> 00:14:16.500 point of view is really an issue in 281 00:14:16.500 --> 00:14:19.500 terms of management. It's quite simple to 282 00:14:19.500 --> 00:14:21.700 understand the problem the issue. 283 00:14:22.600 --> 00:14:25.300 If you give an objective to your 284 00:14:25.300 --> 00:14:28.900 managers, which is about funds from operations using the 285 00:14:28.900 --> 00:14:31.800 taxable income what's going to happen, they will 286 00:14:31.800 --> 00:14:34.200 never try to improve the productivity of the 287 00:14:34.200 --> 00:14:37.500 company because when you improve the productivity very 288 00:14:37.500 --> 00:14:40.200 often, you have to make some write-offs. There will 289 00:14:40.200 --> 00:14:41.800 be some once of course. 290 00:14:42.400 --> 00:14:45.800 And if you take this one soft cost out of that performance, 291 00:14:45.800 --> 00:14:48.100 they will never try to improve the 292 00:14:48.100 --> 00:14:51.600 productivity or at least they will not be that motivated. 293 00:14:52.400 --> 00:14:55.800 Then we have to try to modify this 294 00:14:55.800 --> 00:14:58.300 first try we have the change 295 00:14:58.300 --> 00:15:01.900 in the operating working capital requirement, which is a decline 296 00:15:01.900 --> 00:15:05.100 a reduction by 4,500 and 297 00:15:04.100 --> 00:15:07.600 instead of calculating and 298 00:15:07.600 --> 00:15:10.300 introducing the taxable income there earnings before 299 00:15:10.300 --> 00:15:13.600 tax. We take the current operating profit of the period which 300 00:15:13.600 --> 00:15:16.600 is now 4,200 and 301 00:15:16.600 --> 00:15:19.700 not 200. We have simply taken this 302 00:15:19.700 --> 00:15:22.200 exceptional loss out of the 303 00:15:22.200 --> 00:15:26.600 picture. Then the fence from operation is 4,200 minus 304 00:15:26.600 --> 00:15:29.200 minus 4,500 which is 305 00:15:29.200 --> 00:15:32.600 8,700 minus tax minus 306 00:15:32.600 --> 00:15:35.500 dividend and we get the wrong figure for the 307 00:15:35.500 --> 00:15:38.200 cash. It is not plus 20. It is 308 00:15:38.200 --> 00:15:41.700 4,020, which is absolutely wrong. Then 309 00:15:41.700 --> 00:15:45.200 you understand that modifying is first approach looks 310 00:15:44.200 --> 00:15:47.200 a little bit better on a managerial point 311 00:15:47.200 --> 00:15:51.000 of view, but simply on an accounting point of you it's wrong now, 312 00:15:50.300 --> 00:15:52.300 let's make a second. 313 00:15:53.300 --> 00:15:56.900 We have to introduce this exceptional loss somewhere. 314 00:15:56.900 --> 00:15:59.800 Otherwise a change in cash position is going 315 00:15:59.800 --> 00:16:02.200 to be a wrong figure. We keep the 316 00:16:02.200 --> 00:16:05.200 change in the operating working capital requirement, which is 317 00:16:05.200 --> 00:16:08.500 minus 4,500. We keep 318 00:16:08.500 --> 00:16:12.300 the current operating profit for management reasons and 319 00:16:11.300 --> 00:16:15.600 we have the fence from operations of 8,700. 320 00:16:14.600 --> 00:16:17.200 But as we don't want to get 321 00:16:17.200 --> 00:16:20.500 to 4,020 which is wrong 322 00:16:20.500 --> 00:16:23.200 with deducts the exceptional loss and then 323 00:16:23.200 --> 00:16:26.200 the tax payment and then the dividend payment and we get 324 00:16:26.200 --> 00:16:29.200 20, which is fine on accounting point of view, 325 00:16:29.200 --> 00:16:32.500 but say something which is quite curious because we 326 00:16:32.500 --> 00:16:35.700 have to introduce an exceptional loss which 327 00:16:35.700 --> 00:16:38.300 is not a cash flow which is not a 328 00:16:38.300 --> 00:16:41.200 fast flow in something which is a calculation in 329 00:16:41.200 --> 00:16:44.600 a cash position. This is quite strange 330 00:16:44.600 --> 00:16:46.400 and we have to get rid of that. 331 00:16:47.300 --> 00:16:50.700 Now we have to go back to the working capital requirement 332 00:16:50.700 --> 00:16:53.400 and its Evolution. You understand that 333 00:16:53.400 --> 00:16:56.800 part of the operating working capital requirement reduction 334 00:16:56.800 --> 00:16:59.100 comes from the depreciation of the 335 00:16:59.100 --> 00:17:01.400 inventory for 4000. 336 00:17:01.900 --> 00:17:04.500 And the rest comes from the decline from 337 00:17:04.500 --> 00:17:07.100 the reduction in the sales and the decline of the 338 00:17:07.100 --> 00:17:07.700 activity. 339 00:17:08.600 --> 00:17:11.400 If we hadn't depreciated the inventory, so 340 00:17:11.400 --> 00:17:15.100 excluding this exceptional and hopefully not 341 00:17:14.100 --> 00:17:17.500 recurrent even the inventory would 342 00:17:17.500 --> 00:17:21.700 have had been 400 units and then 8,000 then 343 00:17:20.700 --> 00:17:23.800 you understand a kind of current between 344 00:17:23.800 --> 00:17:26.500 quotes operating working capital requirement 345 00:17:26.500 --> 00:17:29.800 again, excluding this exceptional loss 346 00:17:29.800 --> 00:17:33.000 would have been inventories now 4,000 replaced 347 00:17:32.100 --> 00:17:35.500 by 8,000 plus receivable minus 348 00:17:35.500 --> 00:17:38.900 payables. It would have been 12,500. Now 349 00:17:38.900 --> 00:17:41.800 the current change in working capital requirement 350 00:17:41.800 --> 00:17:44.400 would have been the current operating working 351 00:17:44.400 --> 00:17:48.400 capital requirement today 12,500 minus 352 00:17:47.400 --> 00:17:50.500 the operating working capital requirement at 353 00:17:50.500 --> 00:17:53.200 the end of December 13,000. So the 354 00:17:53.200 --> 00:17:56.800 working capital requirement would have been down by five 355 00:17:56.800 --> 00:17:59.600 hundred now that Karen phones 356 00:17:59.600 --> 00:18:02.900 from operations, which is a combination of the current 357 00:18:02.900 --> 00:18:05.500 operating profit and a Karen 358 00:18:05.500 --> 00:18:08.000 change in the operating working capital requirement. 359 00:18:08.600 --> 00:18:11.200 Been 4,200 for the 360 00:18:11.200 --> 00:18:15.300 current operating profit minus minus 500 361 00:18:14.300 --> 00:18:18.600 which is 4,700 and 362 00:18:17.600 --> 00:18:21.000 now we can build a true fonts 363 00:18:20.100 --> 00:18:22.300 from operation statement. 364 00:18:23.200 --> 00:18:28.600 The operating working capital requirement is definitely 8,500 365 00:18:26.600 --> 00:18:29.300 at the 366 00:18:29.300 --> 00:18:32.200 end of January, but the current change in the operating 367 00:18:32.200 --> 00:18:36.200 working capital requirement is only minus 500 368 00:18:35.200 --> 00:18:39.600 current operating profit 4,200. 369 00:18:38.600 --> 00:18:41.400 The current funds from 370 00:18:41.400 --> 00:18:45.800 operations are now 4,0700 minus 371 00:18:44.800 --> 00:18:47.700 tax payment minus dividend 372 00:18:47.700 --> 00:18:50.600 payment. Both are cash outlays and the change 373 00:18:50.600 --> 00:18:53.700 in cash is 20, which is definitely 374 00:18:53.700 --> 00:18:56.500 what we want to show in the balance sheet. So 375 00:18:56.500 --> 00:18:59.400 you understand that we calculated Karen fonts 376 00:18:59.400 --> 00:19:02.500 from operations, which is a combination of current profit 377 00:19:02.500 --> 00:19:05.400 and Karen changing operating working capital requirement. 378 00:19:05.400 --> 00:19:09.100 And then on a management point of view, it's much much 379 00:19:08.100 --> 00:19:11.500 bear. What is very important 380 00:19:11.500 --> 00:19:14.700 is to be able to evaluate the performance 381 00:19:14.700 --> 00:19:18.800 of managers on relevant indicators. You 382 00:19:17.800 --> 00:19:20.700 remember the first try in 383 00:19:20.700 --> 00:19:22.900 a calculation of the funds from operations. Why? 384 00:19:23.100 --> 00:19:26.400 Tell you you are under evaluating the performance of 385 00:19:26.400 --> 00:19:29.100 managers and what's going to happen. There are not going 386 00:19:29.100 --> 00:19:32.700 to be that much motivated to improve the productivity of 387 00:19:32.700 --> 00:19:35.700 the company and generate exceptional losses 388 00:19:35.700 --> 00:19:38.000 write-offs. Once of course. 389 00:19:38.600 --> 00:19:41.600 But with the second try we were over 390 00:19:41.600 --> 00:19:45.300 evaluating the performance of the manager and encouraging 391 00:19:44.300 --> 00:19:47.800 them to run some depreciation of 392 00:19:47.800 --> 00:19:50.400 the inventories because at the end of the day, it reduces 393 00:19:50.400 --> 00:19:53.500 the working capital requirement and it improves 394 00:19:53.500 --> 00:19:56.500 a funds from operations. If you don't take into 395 00:19:56.500 --> 00:19:58.800 account the exceptional aspect of it. 396 00:19:59.500 --> 00:20:02.200 Now with the current phones from operations, which 397 00:20:02.200 --> 00:20:05.800 is again current profit minus current 398 00:20:05.800 --> 00:20:08.400 change in the operating working capital requirement. 399 00:20:08.400 --> 00:20:11.500 You have the calculation of the cash flow. You 400 00:20:11.500 --> 00:20:14.800 have the fun slows, but you have a much more accurate 401 00:20:14.800 --> 00:20:17.300 description of reality and beyond that 402 00:20:17.300 --> 00:20:20.300 you reduce biases and the purpose 403 00:20:20.300 --> 00:20:23.900 effects of kpis of performance indicators, 404 00:20:23.900 --> 00:20:26.800 which would have been wrongly calculated 405 00:20:26.800 --> 00:20:29.500 and designed which kind of knowledge. Did 406 00:20:29.500 --> 00:20:32.300 we develop during this month of Jerry, we made a 407 00:20:32.300 --> 00:20:36.100 distinction between current and exceptional items, of 408 00:20:35.100 --> 00:20:38.700 course exceptional walls apply to inventories, 409 00:20:38.700 --> 00:20:41.300 but there are many reasons why you are 410 00:20:41.300 --> 00:20:44.700 going to account for exceptional profits and losses. 411 00:20:45.500 --> 00:20:48.500 There's an impact on the operating working capital 412 00:20:48.500 --> 00:20:51.300 requirement and there is an impact in where you 413 00:20:51.300 --> 00:20:54.900 measure the performance of your operating managers funds from 414 00:20:54.900 --> 00:20:58.100 operations. And you remember that you have to take current items 415 00:20:57.100 --> 00:21:00.200 and not Global items. 416 00:21:01.300 --> 00:21:06.000 That leads to something which is quite important in management accounting 417 00:21:04.200 --> 00:21:07.500 has to be useful for 418 00:21:07.500 --> 00:21:11.100 management. And then we take from accounting figures 419 00:21:10.100 --> 00:21:13.400 indicators. We calculate them. 420 00:21:13.400 --> 00:21:16.200 If you did not design your set of 421 00:21:16.200 --> 00:21:20.400 indicators in a proper way, you're going to potentially generate 422 00:21:19.400 --> 00:21:22.800 some perverse effects. So 423 00:21:22.800 --> 00:21:26.300 be very cautious about indicators and 424 00:21:25.300 --> 00:21:28.500 accounting is a support to 425 00:21:28.500 --> 00:21:31.600 management. Also in that sense. We have 426 00:21:31.600 --> 00:21:34.300 to take into account figures which are 427 00:21:34.300 --> 00:21:37.000 relevant for management performance. 428 00:21:38.300 --> 00:21:41.200 Also, we observed that the working capital requirement is 429 00:21:41.200 --> 00:21:44.600 related with the activity interestingly when the 430 00:21:44.600 --> 00:21:47.700 sales are up the working capital requirement is 431 00:21:47.700 --> 00:21:50.900 naturally up you produce more more inventories. 432 00:21:50.900 --> 00:21:53.700 You sell more more accounts receivable you 433 00:21:53.700 --> 00:21:57.000 produce more and you buy more more accounts payable. 434 00:21:56.600 --> 00:21:59.700 So all in all everything's being 435 00:21:59.700 --> 00:22:02.600 equal to working capital requirement is positively correlated with 436 00:22:02.600 --> 00:22:05.400 their revenues, but more working capital requirement 437 00:22:05.400 --> 00:22:09.100 means less cash and respectively less working 438 00:22:08.100 --> 00:22:11.400 capital requirement because Less sales is 439 00:22:11.400 --> 00:22:15.000 more cash. Then you understand that sales 440 00:22:14.100 --> 00:22:17.300 grows consumes cash. 441 00:22:18.100 --> 00:22:21.600 We also observe some economies and diseconomies of 442 00:22:21.600 --> 00:22:24.200 scale because of fixed costs more or less 443 00:22:24.200 --> 00:22:28.000 amortized by revenues which are growing or declining 444 00:22:27.500 --> 00:22:30.200 and you understand that sometimes when you 445 00:22:30.200 --> 00:22:33.200 show some growth in your p&l. Maybe you will have 446 00:22:33.200 --> 00:22:37.100 more profit and less cash gross is 447 00:22:36.100 --> 00:22:40.400 great, but it consumes Financial Resources. 448 00:22:41.200 --> 00:22:44.300 Now this is the end of Jerry. We are already now in 449 00:22:44.300 --> 00:22:47.200 February to launch a studies which are going to 450 00:22:47.200 --> 00:22:50.400 lead us during the third module to 451 00:22:50.400 --> 00:22:53.700 an investment to growth to insourcing first. 452 00:22:53.700 --> 00:22:56.500 Let's launch a studies to prepare for 453 00:22:56.500 --> 00:22:59.100 girls, which is a title of this module.