WEBVTT 1 00:00:00.020 --> 00:00:04.800 Hello and welcome the fourth module of this course Accounting for 2 00:00:05.200 --> 00:00:08.080 Business. You remember the mindset of this training. 3 00:00:08.300 --> 00:00:11.960 The objective is not accounting for the sake of accounting. 4 00:00:12.220 --> 00:00:16.480 The objective is that managers in business operations and understand 5 00:00:17.020 --> 00:00:21.880 how the accounting information is produced and structured 6 00:00:22.460 --> 00:00:27.080 so that it can be analyzed by managers who have to take decisions 7 00:00:27.300 --> 00:00:28.880 in business operations. 8 00:00:29.820 --> 00:00:34.640 The skills you acquire during the first module first understand how profit is 9 00:00:34.640 --> 00:00:35.473 built, 10 00:00:36.340 --> 00:00:41.320 but very quickly we understood that cashers from profit because 11 00:00:41.320 --> 00:00:44.600 there is a time lag between the moment you sell and the moment you get the cash. 12 00:00:44.930 --> 00:00:48.920 There is a time lag between the moment you buy and the moment you pay your 13 00:00:49.200 --> 00:00:51.000 suppliers progressively. 14 00:00:51.000 --> 00:00:55.880 We understood that we really need three fun documents to understand what's going 15 00:00:55.880 --> 00:00:58.120 on in business operation. The p and l, 16 00:00:58.120 --> 00:01:01.400 the income statement is a calculation of the profit, 17 00:01:02.260 --> 00:01:04.680 but as profit differs from cash, 18 00:01:05.060 --> 00:01:09.560 we need another document which explains how cash is moving from one period to 19 00:01:09.560 --> 00:01:10.393 the other. 20 00:01:10.500 --> 00:01:14.720 The p and l on the cash budget are both films what happened 21 00:01:15.220 --> 00:01:18.640 during the period. The balance sheet is a picture at the beginning, 22 00:01:18.860 --> 00:01:19.880 at the end of the period, 23 00:01:20.290 --> 00:01:24.480 which takes into account how much you invested in assets and the financial and 24 00:01:24.480 --> 00:01:28.400 operating resources you needed to raise in order to finance these assets. 25 00:01:29.020 --> 00:01:32.760 Thanks was the first module we've been able to introduce a first concept of 26 00:01:33.080 --> 00:01:37.960 financial accounting and also a financial analysis because what is 27 00:01:38.280 --> 00:01:42.400 absolutely key is to interpret the figures so that you can make decisions 28 00:01:43.340 --> 00:01:45.280 to fundamental concepts, 29 00:01:45.590 --> 00:01:50.320 working capital requirement and funds from our operations. In both case, 30 00:01:50.470 --> 00:01:53.040 it's about cash. So second, 31 00:01:53.150 --> 00:01:58.000 modular started with introducing the difference between a current profit and 32 00:01:58.000 --> 00:01:59.120 an exceptional profit. 33 00:01:59.750 --> 00:02:03.080 This is a fundamental difference because current means recur, 34 00:02:03.080 --> 00:02:05.600 something which is going on year after year. 35 00:02:05.670 --> 00:02:08.200 Exceptional looks like an accident, 36 00:02:08.690 --> 00:02:11.160 which should not happen again in the future. 37 00:02:12.010 --> 00:02:16.920 There was also an exercise to build the financial statements and understand 38 00:02:17.130 --> 00:02:21.200 funds from operations, current funds from operations, and again, 39 00:02:21.200 --> 00:02:25.040 you have the distinction between current and non-current exceptional. 40 00:02:26.100 --> 00:02:30.840 We observed that the company was growing, which is great commercial success, 41 00:02:31.460 --> 00:02:34.920 but growth consumes financial resources, 42 00:02:34.970 --> 00:02:39.600 which is going to be definitely a permanent concern for our business. 43 00:02:40.580 --> 00:02:45.280 We kept on interpreting the figures, financial analysis, KPIs, 44 00:02:45.750 --> 00:02:47.040 performance indicators, 45 00:02:47.260 --> 00:02:51.760 but what is very important is to understand the relevance of these KPIs, 46 00:02:52.100 --> 00:02:55.000 how to use them and not misuse them. 47 00:02:55.820 --> 00:02:58.800 And we decided as the company was successful to 48 00:02:58.800 --> 00:03:00.260 Prepare the company for growth. 49 00:03:00.800 --> 00:03:05.620 And then growth means we have to invest for the future and it was the objective 50 00:03:05.620 --> 00:03:10.300 of module three to understand how you invest in production capacities. 51 00:03:10.300 --> 00:03:13.780 This is named tangibles. Module four is intangibles. 52 00:03:14.490 --> 00:03:18.980 Investing means that you are spending the monnet today so that tomorrow, 53 00:03:19.160 --> 00:03:21.900 thanks to your project, you're going to generate benefits, 54 00:03:22.680 --> 00:03:26.420 but first you have to evaluate the financial performance or relevance of the 55 00:03:26.420 --> 00:03:30.620 project. Is it good or bad on an economic or financial point of view? 56 00:03:31.320 --> 00:03:32.460 But interestingly, 57 00:03:32.830 --> 00:03:37.260 production cost was an extremely important concept. 58 00:03:38.070 --> 00:03:39.860 Beforehand we were buying, 59 00:03:40.160 --> 00:03:45.020 so production was just purchasing and then the cost of goods All 60 00:03:45.120 --> 00:03:48.620 was simply the cost of purchasing the goods we were selling to the customers. 61 00:03:48.800 --> 00:03:50.060 Now we manufacture them, 62 00:03:50.480 --> 00:03:54.780 so the production cost is much more sophisticated and you have to introduce 63 00:03:54.910 --> 00:03:58.820 wages and salaries and consumption of supplies and depreciation and so on and so 64 00:03:58.820 --> 00:04:02.780 forth. Same story for the evaluation of inventories. 65 00:04:03.450 --> 00:04:06.020 Inventories, no more purchasing the goods, 66 00:04:06.170 --> 00:04:10.220 it's manufacturing and then the production cost is absolutely essential. 67 00:04:11.770 --> 00:04:13.260 When we observe the cost, 68 00:04:13.480 --> 00:04:16.860 we made a distinction between fixed and variable cost, 69 00:04:16.860 --> 00:04:21.300 depending on the evolution of cost when sales are moving up or down, 70 00:04:22.080 --> 00:04:26.180 but when revenues are growing and fixed cost remain fixed, 71 00:04:26.410 --> 00:04:28.140 then the fixed cost per unit, 72 00:04:28.440 --> 00:04:33.180 the fixed cost divided by the number of units we selling to the customers is 73 00:04:33.180 --> 00:04:36.540 down. And this is a very important concept and phenomenon, 74 00:04:36.540 --> 00:04:40.300 which is named economies of scale. Phenomenal. In business, 75 00:04:41.360 --> 00:04:45.740 we were investing to buying a machine and we did not have enough cash in a 76 00:04:45.740 --> 00:04:47.100 pocket to pay the machine. 77 00:04:47.530 --> 00:04:52.420 Then we need to go and visit the banker to get some additional 78 00:04:52.570 --> 00:04:56.060 financing, introduction to financing, financial structure, 79 00:04:56.170 --> 00:04:57.860 financial strategy of the company. 80 00:04:59.070 --> 00:05:02.850 We kept on deep diving in the concept of operating, 81 00:05:02.850 --> 00:05:05.610 working capital requirement and funds from operation, 82 00:05:06.190 --> 00:05:09.130 but we also introduced a very fundamental concept, 83 00:05:09.170 --> 00:05:13.130 which is named E B D earnings before interest in taxes, 84 00:05:13.410 --> 00:05:15.490 depreciation, and amortization, 85 00:05:15.540 --> 00:05:18.770 which is so well known in business now, 86 00:05:18.770 --> 00:05:20.650 we have invested intangibles. 87 00:05:21.070 --> 00:05:24.930 We are ready now to invest in intangible assets. 88 00:05:25.880 --> 00:05:30.770 This module is going to be structured exactly as the same as the former modules. 89 00:05:31.300 --> 00:05:32.890 First, at the end of this video, 90 00:05:33.250 --> 00:05:38.210 I will introduce you the development plan for the third quarter starting in 91 00:05:38.280 --> 00:05:42.770 July. In July, we decide to invest in research and development. 92 00:05:43.050 --> 00:05:45.090 Research and development is very immaterial, 93 00:05:45.790 --> 00:05:50.050 but it is an investment which we realize inside we build 94 00:05:50.590 --> 00:05:54.730 in this investment in research and development hiring people. 95 00:05:55.310 --> 00:05:56.730 In August, there will be another 96 00:05:56.880 --> 00:06:01.540 Investment in immaterial assets, but it will be through acquisition. 97 00:06:01.560 --> 00:06:06.140 We are going to acquire a software license in order to improve the quality of 98 00:06:06.160 --> 00:06:09.500 our management of business operations. Now in September, 99 00:06:09.600 --> 00:06:13.660 we are going to consolidate that and we are going to be ready to build a 100 00:06:13.660 --> 00:06:16.900 factory, which will be the objective of module five. 101 00:06:17.660 --> 00:06:22.140 I will obviously develop the monthly financial analysis to see the progress of 102 00:06:22.140 --> 00:06:25.340 the company. As far as tools are concerned, 103 00:06:25.680 --> 00:06:29.700 you have the same kind of structure, presentation, slides and audio, 104 00:06:30.040 --> 00:06:34.580 the spreadsheet in parallel with the formulas, the figures and the results. 105 00:06:35.160 --> 00:06:39.300 And there will be a test at the end of the module. Now, 106 00:06:39.340 --> 00:06:41.180 a few words about the development plan. 107 00:06:41.930 --> 00:06:46.100 When we look at the past in March when we bought the machine, 108 00:06:46.400 --> 00:06:49.540 we were producing and selling 1,900 units. 109 00:06:50.680 --> 00:06:51.513 In June, 110 00:06:51.800 --> 00:06:55.740 it is 2,900 and we anticipate that growth will go on 111 00:06:56.290 --> 00:07:01.100 July, 3000 600. Uh, a reduction in August because of holidays, 112 00:07:01.100 --> 00:07:03.940 and it starts again in September 4,300. 113 00:07:04.720 --> 00:07:08.580 But you understand that the capacity of the machine is limited to 5,000. 114 00:07:09.000 --> 00:07:13.940 So we are getting closer and closer to saturation of the capacity of the 115 00:07:13.940 --> 00:07:18.740 machine. Now we have to think about investing for the future and significantly 116 00:07:19.100 --> 00:07:23.300 incrementing the capacity. We have an industrial ambition. 117 00:07:23.470 --> 00:07:25.540 We've been successful and we want to go on. 118 00:07:26.200 --> 00:07:29.260 So we want to offer new products to the customers. 119 00:07:29.710 --> 00:07:32.380 These new products are going to come from innovation, 120 00:07:34.280 --> 00:07:38.980 but if innovation is really successful and we can develop product supply, 121 00:07:39.250 --> 00:07:43.460 then we are going to sell more and we have to scale up the production capacity. 122 00:07:43.880 --> 00:07:46.940 So the machine is going to be transformed into a factory, 123 00:07:47.030 --> 00:07:52.020 which will be module five. Before we build the factory, 124 00:07:52.560 --> 00:07:55.700 we need to have the product ready for production, 125 00:07:56.440 --> 00:07:59.260 and then we have to invest in technological expenses. 126 00:08:00.480 --> 00:08:05.060 You remember we have one engineer today who is supporting the business 127 00:08:05.150 --> 00:08:08.740 operations, uh, management of operations and so on. 128 00:08:09.430 --> 00:08:14.220 We'll probably need a second one before we start producing with a new 129 00:08:14.220 --> 00:08:19.140 factory management, team management. We need a supervisor. That's fine. 130 00:08:19.440 --> 00:08:23.420 Now we are going to invest in development and we are going to hire three people 131 00:08:24.280 --> 00:08:27.180 in July, a fourth, one in August, 132 00:08:27.240 --> 00:08:29.700 and the fifth one in September, 133 00:08:29.960 --> 00:08:34.580 so that we are ready with a new product to flood the market with our product. 134 00:08:36.220 --> 00:08:39.990 Then you have a cost. The cost is 1,500. 135 00:08:40.100 --> 00:08:43.150 Unit of currency per person, doesn't matter the figure. 136 00:08:43.220 --> 00:08:47.470 What is important is to understand that we are going to spend more and more. 137 00:08:48.360 --> 00:08:52.150 These development costs are going to be capitalized, 138 00:08:52.530 --> 00:08:54.870 and I will elaborate on that point in a few 139 00:08:54.980 --> 00:08:56.940 Seconds. When you capitalize, 140 00:08:57.440 --> 00:09:01.300 you build in a kind of net fixed asset, 141 00:09:01.590 --> 00:09:05.740 which you are going to amortize. You depreciate when it's tangible, 142 00:09:06.200 --> 00:09:08.100 you amortize when it's intangible, 143 00:09:08.680 --> 00:09:13.580 and we decide to amortize these developed more expenses over 36 144 00:09:13.580 --> 00:09:17.900 months. Now, should you capitalize r d expenses or not? 145 00:09:17.900 --> 00:09:19.860 There are some arguments in favor of, 146 00:09:20.190 --> 00:09:24.180 there are some arguments against in favor of capitalizing. 147 00:09:24.360 --> 00:09:26.780 The strong argument is that it is an investment. 148 00:09:27.400 --> 00:09:31.020 It is an investment which is not related with the activity today, 149 00:09:31.040 --> 00:09:32.660 but with the activity tomorrow, 150 00:09:33.160 --> 00:09:37.620 an investment is you spend today and you get the benefits in the future. Now, 151 00:09:37.620 --> 00:09:38.940 on an accounting point of view, 152 00:09:38.940 --> 00:09:41.580 what is the consequence of this economic statement? 153 00:09:43.050 --> 00:09:46.380 Imagine you decide to write off as a cost, 154 00:09:46.600 --> 00:09:48.580 the r and d expenditures. 155 00:09:49.440 --> 00:09:54.420 So today you are investing in r and d. You are spending the money today, 156 00:09:54.480 --> 00:09:57.220 and it's going to be introduced in the p and l of today. 157 00:09:57.440 --> 00:09:59.100 But what is the role of the p and l? 158 00:09:59.240 --> 00:10:02.740 The role of the p and l is to understand when you sold products, 159 00:10:02.800 --> 00:10:04.060 did you make a profit or not? 160 00:10:04.320 --> 00:10:08.940 So you are going to put against that revenues the cost which are 161 00:10:08.940 --> 00:10:10.700 associated with the revenues, 162 00:10:11.160 --> 00:10:15.020 but what you invest in r and d today is not associated with the revenues of 163 00:10:15.030 --> 00:10:17.740 today. It's associated with the revenues of tomorrow. 164 00:10:18.560 --> 00:10:21.300 It should not show in the p and l of today. 165 00:10:22.240 --> 00:10:26.220 You understand why r and d expenses have to be kept lies. 166 00:10:26.880 --> 00:10:31.540 Of course, there are some arguments again that r and d is a risk. 167 00:10:31.840 --> 00:10:36.220 Is it going to be successful or not? Well, basically you don't know, 168 00:10:36.360 --> 00:10:39.860 and this is why when you capitalize something in the hope that there will be 169 00:10:39.860 --> 00:10:43.340 future revenues and you don't know if the future revenues are going to be 170 00:10:43.340 --> 00:10:45.860 generated or not. Of course this is risky. 171 00:10:46.520 --> 00:10:50.740 And what do you show in the balance sheet? The cost. What is the value? 172 00:10:51.080 --> 00:10:53.860 The value depends very much on the commercial success, 173 00:10:54.280 --> 00:10:58.100 and this is why there is a confrontation between the value and the cost. 174 00:10:58.650 --> 00:11:03.500 This is why some people are against the capitalizing, in my opinion, 175 00:11:03.760 --> 00:11:08.420 and in this exercise we decide to capitalize because it's 176 00:11:08.850 --> 00:11:12.020 very much about the economic nature of r and d. 177 00:11:13.090 --> 00:11:17.900 Then we are ready to start r and d in July. This will be the next video.