WEBVTT 1 00:00:01.090 --> 00:00:05.430 Now we are in July and ready to start investing in the first of these two 2 00:00:05.430 --> 00:00:09.150 intangible assets, which we need for the future development. 3 00:00:09.870 --> 00:00:13.830 I mean research and development. We start investing in r and d. 4 00:00:14.010 --> 00:00:16.270 What's going to happen in July? First, 5 00:00:16.530 --> 00:00:21.110 the sales figure is not exactly what we anticipated a month before. 6 00:00:21.780 --> 00:00:23.510 It's real business, it's real life. 7 00:00:23.890 --> 00:00:28.150 We anticipated we would sell 3,300 units. We are selling more, 8 00:00:28.160 --> 00:00:29.110 which is good news, 9 00:00:29.250 --> 00:00:33.630 but the question which is underlying is do we have enough capacity? 10 00:00:34.130 --> 00:00:34.963 The answer is yes, 11 00:00:35.090 --> 00:00:39.150 but we have to check what are the forecast for 12 00:00:39.290 --> 00:00:40.790 August, 3000, 13 00:00:40.900 --> 00:00:45.830 less than 3,600 because we are in summer holidays and so on and 14 00:00:45.830 --> 00:00:46.250 so forth, 15 00:00:46.250 --> 00:00:50.950 and we would like to get to an inventory which represents 50% of the 16 00:00:50.980 --> 00:00:52.870 anticipated sales for August. 17 00:00:53.360 --> 00:00:56.390 50% of 3000 is 1,500, 18 00:00:56.690 --> 00:01:01.670 so how many units should we produce? 3,985, 19 00:01:01.670 --> 00:01:05.790 which is a combination of the sales in July, 3000 600 20 00:01:06.360 --> 00:01:11.150 minus what we already have in inventories, which is 1,150, 21 00:01:11.410 --> 00:01:16.230 and we have to add on top of that the level of inventories we want 22 00:01:16.490 --> 00:01:21.270 for August, 1000 500 production is almost 23 00:01:21.300 --> 00:01:25.070 4,000. It's less than 5,000, which is the capacity of the machine. No big deal. 24 00:01:25.580 --> 00:01:27.350 This is why we need the six workers, 25 00:01:27.770 --> 00:01:30.590 but we want to hire three and engineers, 26 00:01:31.030 --> 00:01:35.310 researchers in research and development to prepare the future. Now, 27 00:01:35.330 --> 00:01:39.030 the organizational chart is going to be a little bit different. 28 00:01:39.540 --> 00:01:43.310 Same number of people in the support, activity, management, administration, 29 00:01:43.360 --> 00:01:46.910 sales and engineering. Same number of people in production, 30 00:01:47.450 --> 00:01:52.190 but we increment the headcount by three because we are starting our effort 31 00:01:52.530 --> 00:01:54.030 in developing new product. 32 00:01:54.900 --> 00:01:57.830 What is very interesting is to calculate the production cost, 33 00:01:58.220 --> 00:02:02.510 same development as before. In August, we anticipate 3000 units. 34 00:02:02.890 --> 00:02:05.950 We want to have, we want to reach a level of adventure, 35 00:02:06.000 --> 00:02:10.990 which matches with 50% of the forecast, 1,500, and again, 36 00:02:10.990 --> 00:02:15.030 the production which we plan is 3,945. 37 00:02:15.180 --> 00:02:19.990 What about the production cost? Business as usual, usual wages and salaries, 38 00:02:20.350 --> 00:02:23.950 supervision workers, uh, consumption of supplies, 39 00:02:24.170 --> 00:02:27.310 raw materials and depreciation. No r d, 40 00:02:27.930 --> 00:02:31.470 no r and d because r and d is not a production cost, 41 00:02:31.950 --> 00:02:35.870 r and d is an investment which is going to be related with the revenues we are 42 00:02:35.870 --> 00:02:40.790 going to generate in the future, not in July. In July, we are investing, 43 00:02:40.850 --> 00:02:43.150 so the cost of the products, 44 00:02:43.150 --> 00:02:47.150 which we are going to sell in July and later on in August 45 00:02:47.970 --> 00:02:51.270 has nothing to do with the amount of money which we invest today. 46 00:02:51.990 --> 00:02:53.070 R and d is not a cost. 47 00:02:53.180 --> 00:02:57.070 It's an investment and it is a cost which is currently being capitalized. 48 00:02:57.780 --> 00:03:00.100 Once we start selling products, 49 00:03:00.430 --> 00:03:03.700 which are going to require the r and d in which we are investing today, 50 00:03:03.770 --> 00:03:06.500 then we'll amortize the research and development, 51 00:03:06.500 --> 00:03:08.540 which is absolutely not the case today. 52 00:03:09.150 --> 00:03:14.100 Total production cost 71,620 divided by the 53 00:03:14.100 --> 00:03:18.780 production, which we plan for July 18 point 15. 54 00:03:19.640 --> 00:03:24.180 Now we can move to the traditional inventory calculation. You remember, 55 00:03:24.240 --> 00:03:28.380 we have some inventories, 1,155 units, 56 00:03:28.870 --> 00:03:32.300 which we are produced at the cost of 18.67. 57 00:03:32.300 --> 00:03:37.060 This is a value of the inventory once we are manufacturing the goods 58 00:03:37.160 --> 00:03:41.220 and we're producing at 18 point 15, which is lower. 59 00:03:41.720 --> 00:03:45.460 Why economies are scale, higher volume, same fixed cost. 60 00:03:45.570 --> 00:03:46.780 Cost per unit is down. 61 00:03:47.160 --> 00:03:50.700 The value of the inventory at the end of the month is going to be the cost of 62 00:03:50.700 --> 00:03:54.900 producing these inventory is during the month, which is the same 18.5. 63 00:03:55.530 --> 00:04:00.180 Cost of sales is going to be a combination of the products which 64 00:04:00.330 --> 00:04:02.860 were in the warehouse at the beginning of the period, 65 00:04:02.960 --> 00:04:05.620 1,155. 66 00:04:05.840 --> 00:04:10.820 We needed to produce and sell 2,445 in order to be able 67 00:04:10.920 --> 00:04:13.700 to deliver 3,600. 68 00:04:14.120 --> 00:04:16.620 How many products are still in the warehouse? 69 00:04:17.010 --> 00:04:21.780 Basically 1550% of what we anticipate sales 70 00:04:21.840 --> 00:04:24.580 for August, same calculation as before, 71 00:04:24.880 --> 00:04:29.020 and the 18.32 is a combination is a weighted average between 72 00:04:29.460 --> 00:04:33.500 1867 yesterday, 1815 today. 73 00:04:34.360 --> 00:04:35.620 Now what about the p and l? 74 00:04:35.680 --> 00:04:39.860 We have the sales figure coming from B2C and B2B sales, cost of sales, 75 00:04:39.860 --> 00:04:44.300 which just calculated gross margin and then we have to deduct indirect 76 00:04:44.850 --> 00:04:48.620 cost, so it's about administrations, about sales and marketing. 77 00:04:48.620 --> 00:04:52.660 It's about engineering and no r and d because r d is not a cost. 78 00:04:52.970 --> 00:04:53.803 It's an investment. 79 00:04:54.170 --> 00:04:59.100 Then the profit or the income generated by business operations about sales 80 00:04:59.390 --> 00:05:04.260 Today is 25,150 and it does not take into 81 00:05:04.260 --> 00:05:09.180 account again the r and d from the operating income to the bottom 82 00:05:09.210 --> 00:05:12.060 line. We deduct the interest expense. We deduct the tax, 83 00:05:12.150 --> 00:05:14.540 which is not going to be paid in July, but later, 84 00:05:15.120 --> 00:05:17.820 and then the bottom line is almost 20,000. 85 00:05:18.160 --> 00:05:22.660 As we anticipate that in the future we'll need as much cash as possible to build 86 00:05:22.740 --> 00:05:23.740 a factory. Of course, 87 00:05:23.800 --> 00:05:27.460 we don't return any cash to the shareholder and we arrange invest 88 00:05:27.720 --> 00:05:31.980 100% with distribute no profit to the shareholders. 89 00:05:32.720 --> 00:05:37.660 The net income is entirely retained in the balance sheet in the equity. 90 00:05:38.210 --> 00:05:41.700 Then from the p and l, we can move to the cash. What about cash? 91 00:05:41.730 --> 00:05:46.260 Cash from sales, how much do we cash in from our customers? 92 00:05:46.730 --> 00:05:51.140 Basically the B2B sales of last month plus the 93 00:05:51.560 --> 00:05:55.820 B2C sales of July. Business as usual, how much is left? 94 00:05:56.300 --> 00:06:00.740 Accounts receivable at the end of the month is a B2B revenues we were generating 95 00:06:01.280 --> 00:06:03.700 in July, which are going to be paid in August. 96 00:06:03.770 --> 00:06:08.300 Cash from sales is 94,500. No increase, 97 00:06:08.640 --> 00:06:11.980 no decrease in financial debt. No equity is U of any kind, 98 00:06:12.520 --> 00:06:16.620 so the inflows is just a cash inflows from revenues. 99 00:06:17.330 --> 00:06:18.820 What about accounts payable? 100 00:06:19.850 --> 00:06:23.980 What is due to the suppliers is 50% of the purchases of June. 101 00:06:24.250 --> 00:06:29.220 What is due to the suppliers at the end of July is 50% of the purchases of 102 00:06:29.290 --> 00:06:34.140 July, so we can calculate the accounts payable and how much do we cash out? 103 00:06:34.970 --> 00:06:39.340 Basically 50% of June and 50% of 104 00:06:39.810 --> 00:06:42.500 July 57 or 40. 105 00:06:42.960 --> 00:06:46.700 Now of course what we pay to our suppliers is not one, a unique cash outlet. 106 00:06:46.700 --> 00:06:49.460 We have to pay for administration, for sales, for engineering, 107 00:06:49.460 --> 00:06:51.380 production provision workers. 108 00:06:52.000 --> 00:06:55.140 We don't cash out for taxes because it's going to be paid later. 109 00:06:55.680 --> 00:06:59.420 We don't cash out for dividend because we decided not to pay the dividend. 110 00:07:00.200 --> 00:07:03.620 We don't have to cash out for the purchasing price of the machine because it's 111 00:07:03.620 --> 00:07:07.300 already spent. We depreciate. That's in the p and l. 112 00:07:07.300 --> 00:07:10.620 That's in the production cost. We don't cash out that the past, 113 00:07:11.600 --> 00:07:16.540 but we have now to take into account in the cashflow the cash outlet, 114 00:07:16.540 --> 00:07:20.460 which is generated by hiring three people to develop new product. 115 00:07:20.980 --> 00:07:23.380 R and d is not yet in the p and l, 116 00:07:23.720 --> 00:07:27.220 but it is yet in a cashflow statement. It's a cash out, 117 00:07:27.430 --> 00:07:32.060 which should show somewhere in our cash position. Last and not least, 118 00:07:32.200 --> 00:07:34.220 we have to cash out for the interest expense. 119 00:07:34.240 --> 00:07:38.740 Now we have the sum of the cash outlays and we can calculate the change in the 120 00:07:38.740 --> 00:07:43.620 cash position. Inflows minus outflows is 16,820, 121 00:07:43.950 --> 00:07:47.740 which is piling up on top of the cash at the beginning of the period. 122 00:07:47.800 --> 00:07:52.140 Now we have 27,320 in the bank account. 123 00:07:52.680 --> 00:07:57.020 We can now build the balance sheet and there are not many changes in the balance 124 00:07:57.020 --> 00:08:00.180 sheet. Property, plant equipment, growth, 125 00:08:00.430 --> 00:08:04.940 purchasing process and machine minus accumulated depreciation during four 126 00:08:04.940 --> 00:08:07.140 months. Property plant equipment, 127 00:08:07.460 --> 00:08:12.420 tangible fixed asset net 56,000 inventories 128 00:08:12.530 --> 00:08:16.740 were calculated. Accounts receivable were calculated capital, 129 00:08:17.080 --> 00:08:19.340 no equity issue retain earnings. 130 00:08:19.690 --> 00:08:24.340 It's accumulated retain earnings end of June plus 100% of the net income 131 00:08:24.340 --> 00:08:28.140 generated in July. Some of these do a shareholders equity, 132 00:08:28.240 --> 00:08:31.380 no change in financial debt, which is going to be repair later. 133 00:08:31.590 --> 00:08:35.820 There is no dividends payable because we decided to retain 100% of the net 134 00:08:35.820 --> 00:08:40.380 income accounts payable calculated previously income tax payable. 135 00:08:40.480 --> 00:08:45.420 It is the accumulation end of June plus the income tax we generate 136 00:08:45.680 --> 00:08:47.060 out of the profitability, 137 00:08:47.470 --> 00:08:51.100 which is a consequence of profitable sales and revenues. 138 00:08:51.360 --> 00:08:55.580 In July 11,854, 139 00:08:56.400 --> 00:08:58.780 the cash was calculated. What is missing? 140 00:08:59.410 --> 00:09:04.220 What is missing is this new asset which we are currently creating. 141 00:09:04.480 --> 00:09:06.260 It is under construction. 142 00:09:07.000 --> 00:09:11.620 The intangible assets is about capitalized, r and d, three people, 143 00:09:11.840 --> 00:09:16.060 1,500, 4,500. It's not yet. 144 00:09:16.130 --> 00:09:19.780 Amortized obviously because it is again, under construction, 145 00:09:19.880 --> 00:09:23.060 is exactly the same as a building you are building. 146 00:09:23.850 --> 00:09:28.340 Once construction is over and once we start selling products, 147 00:09:28.340 --> 00:09:30.780 which are the consequence of this investment in r and d, 148 00:09:30.890 --> 00:09:35.220 then we are going to start amor. This will be module five, 149 00:09:36.580 --> 00:09:40.300 a little bit of financial analysis, which is straightforward. Sales are growing, 150 00:09:40.520 --> 00:09:44.260 so we anticipate as the fixed costs are going to remain fixed, 151 00:09:44.330 --> 00:09:47.300 that there will be some economies of scale. That's good news. 152 00:09:47.480 --> 00:09:49.940 We are commercially successful, 153 00:09:50.920 --> 00:09:55.340 and then these revenues are transformed into ebit and when you add up 154 00:09:55.340 --> 00:09:59.980 depreciation and amortization ebitda, EBIT is 25,000, 155 00:10:00.080 --> 00:10:01.660 EBITDA is 26,000, 156 00:10:02.160 --> 00:10:05.700 but this amount of money is not directly our cash account for a very simple 157 00:10:05.760 --> 00:10:07.380 reason. At the consequence, 158 00:10:07.400 --> 00:10:12.100 the operating working capital requirement is up by 4,590, 159 00:10:12.990 --> 00:10:17.660 which goes against in deduction of the EBITDA and how much 160 00:10:17.840 --> 00:10:20.300 is generated by business operations, 161 00:10:20.610 --> 00:10:24.460 current funds from operations 21,560. 162 00:10:25.320 --> 00:10:27.300 Now we can start building something, 163 00:10:27.300 --> 00:10:30.460 which is going to be eventually name funds flow statement, 164 00:10:30.570 --> 00:10:35.300 cash flow statement EBITDA 26,000 minus change in the 165 00:10:35.300 --> 00:10:39.620 operating working capital requirement. Again, 21 5 6 oh. 166 00:10:40.080 --> 00:10:43.460 Now these are funds which are generated by the current business operations, 167 00:10:43.640 --> 00:10:48.100 but it's about business operations and about financing. We pay no taxes. 168 00:10:48.600 --> 00:10:51.500 We accrue for some taxes, but we are going to pay later, 169 00:10:51.930 --> 00:10:53.500 zero in cash out later today. 170 00:10:54.140 --> 00:10:58.060 Interest expense is accrued and paid in July 240. 171 00:10:58.680 --> 00:11:02.340 How much is really generated by all the operations of the company is 172 00:11:02.340 --> 00:11:07.220 twenty one, three hundred and twenty, and then we have to deduct from that. 173 00:11:07.280 --> 00:11:11.780 The investment is not exactly capital expenditures as investing in a machine, 174 00:11:12.020 --> 00:11:16.340 property plate equipment, but it is also an investment. We invest in r and d. 175 00:11:16.720 --> 00:11:17.000 Now, 176 00:11:17.000 --> 00:11:21.660 how much is left free cash flow after taking into account all the investment, 177 00:11:22.080 --> 00:11:25.380 we have to cash out 16,820, 178 00:11:25.870 --> 00:11:29.700 which is going to be entirely in the bank account of the company because there 179 00:11:29.700 --> 00:11:33.660 is no change in the financial debt and because we don't pay any dividend to the 180 00:11:33.660 --> 00:11:37.900 shareholders. Let's move on with the financial analysis. You remember, 181 00:11:38.040 --> 00:11:40.020 the next step is about margins, 182 00:11:40.290 --> 00:11:43.620 operating margins generated by business operations. 183 00:11:44.200 --> 00:11:48.260 The first one which we calculate is gross margin and then we show economies of 184 00:11:48.260 --> 00:11:49.180 scale. Why? 185 00:11:49.690 --> 00:11:54.420 Because their production costs are fixed for part of them and 186 00:11:54.540 --> 00:11:55.540 revenues are up. 187 00:11:55.720 --> 00:11:59.940 The consequence is the gross margin rate is going to be up by 3%, 188 00:12:00.640 --> 00:12:01.780 and if you remember, 189 00:12:02.280 --> 00:12:07.060 it was a reason why we were buying a machine to profit from economies of 190 00:12:07.060 --> 00:12:08.100 scale. Now, 191 00:12:08.280 --> 00:12:12.540 as in direct costs are also predominantly fixed. 192 00:12:12.750 --> 00:12:15.060 There is an add up of 1%, 193 00:12:15.110 --> 00:12:19.740 which is due to economies of scale generated by indirect support 194 00:12:19.850 --> 00:12:22.540 cost. You remember no r and d in there, 195 00:12:22.960 --> 00:12:24.860 so 3% come from growth margin, 196 00:12:25.320 --> 00:12:29.220 1% come from indirect cost and the operating income, 197 00:12:29.360 --> 00:12:33.580 the operating margin is up by 4%. This is nice economies of scale, 198 00:12:34.230 --> 00:12:38.340 which knowledge, which skills did we acquire in July? 199 00:12:39.200 --> 00:12:43.180 You already know about material investment, tangible assets, 200 00:12:43.700 --> 00:12:44.820 property plate equipment. 201 00:12:44.960 --> 00:12:49.260 Now we add up something which is absolutely fundamental in a development of any 202 00:12:49.260 --> 00:12:52.820 company, immaterial investment, which is named intangible. 203 00:12:53.730 --> 00:12:56.540 Here we took into account r and d, but r d, 204 00:12:56.540 --> 00:13:01.340 which was devoted focusing on the development on one product and 205 00:13:01.340 --> 00:13:03.380 service, which is I identified. 206 00:13:04.010 --> 00:13:08.860 This is the reason why we can capitalize because there will be revenues 207 00:13:08.860 --> 00:13:11.860 generated later against this r and d, 208 00:13:11.860 --> 00:13:14.940 which is identified focusing on this product. 209 00:13:15.730 --> 00:13:19.820 Some companies very often they invest in kind of general r and d, 210 00:13:20.230 --> 00:13:25.020 which is an r and d expense, useful for any development. 211 00:13:25.250 --> 00:13:26.940 Then you cannot capitalize, 212 00:13:27.520 --> 00:13:32.060 and then this general r and d investment is expensed 213 00:13:32.250 --> 00:13:37.020 written off the day, the period, the months it is generated. 214 00:13:37.870 --> 00:13:40.620 There are some other immaterial investment. For example, 215 00:13:41.000 --> 00:13:44.260 the purchase of software, this is going to be in August, 216 00:13:44.880 --> 00:13:49.820 but you can also internally develop the software and then it's going to be 217 00:13:49.820 --> 00:13:52.340 exactly the same accounting process as r and d. 218 00:13:52.440 --> 00:13:56.420 You are going to progressively capitalize the software, develop more expenses, 219 00:13:57.640 --> 00:14:00.860 and there are also plenty of other material investments. For example, 220 00:14:00.860 --> 00:14:05.740 if you are in sport and you purchase the contract so that 221 00:14:05.740 --> 00:14:08.540 you can use a player in soccer, in basketball, 222 00:14:08.560 --> 00:14:10.820 or whatsoever you pay for the contract. 223 00:14:10.820 --> 00:14:14.940 This is immaterial and this is not the subject of this course, 224 00:14:15.480 --> 00:14:18.740 but if you make an acquisition, there will be some goodwill. 225 00:14:18.740 --> 00:14:22.820 There will be some brand, some market share showing in your balance sheet. 226 00:14:22.820 --> 00:14:26.100 These are immaterial investment. Those are plenty of them, 227 00:14:26.480 --> 00:14:28.180 and we are focusing on two of them. 228 00:14:28.800 --> 00:14:33.220 One is built inside r and d and one is purchased outside 229 00:14:33.700 --> 00:14:37.780 software. What did we show in the balance sheet? It's a fixed asset. 230 00:14:37.810 --> 00:14:41.020 It's a non-current asset, but it's not yet amortized. 231 00:14:41.630 --> 00:14:43.660 Later on the process will be over, 232 00:14:44.280 --> 00:14:48.780 the asset will not be under construction. It'll be completely built, 233 00:14:49.120 --> 00:14:50.500 and then we are going to generate 234 00:14:50.900 --> 00:14:55.300 Revenues out of selling the products and then we are going to 235 00:14:55.500 --> 00:14:59.740 amortize the r and d expenditures. Now, 236 00:14:59.740 --> 00:15:04.700 this was for July, built in non-current intangible assets. 237 00:15:04.760 --> 00:15:08.860 Now we are going to acquire, we are going to purchase software license, 238 00:15:09.550 --> 00:15:14.020 which is going to be another investment in immaterial assets.