Welcome back my friends. I think that you have learned already the importance that the budget might have for a company. Now, what I like to address is the importance of monitoring the budget, and also to set up financial reports to check whether or not your budget is consistent to what you have used as assumption. For example, we will start with the concept overview income component, how we would do a financial report. Before we do a financial report or a budget, it's absolutely crucial to understand the business we are involved with. And the second one, not just the business, but also understand the market, otherwise, we're not going to be able to do a budget. After you understand the market and the macroeconomic scenario, evaluate the external scenario in terms of opportunities and threats, to see if your business is absolutely appealable, and you can do, and you can move forward to get a business profitable that could also generate cash. Once you understand the business, the environment, and also we have to understand the macroeconomic scenario, but not just the macroeconomic scenario, but also the macro drivers that impact your business. It does not matter if you know that interest rate is going to increase, interest rates is going to decrease, income, household income is going increase or not. It just depends if those variables affect your business. Once those variable, you figure out that those variables is or are key for your business, you're ready to establish your budget. And then, once you figure out all Macroeconomic Drivers, you set up the strategy. I know that for example, for the next two or five years, my Macroeconomic Scenario is such as X and then we set up a strategy. Once you set up a strategy, you set up the assumptions. How much my sales are going to increase? How much my costs are going to increase? Is inflation, is going affect negatively my budget, my business or not. So that's the part you've set up the assumption. After you set up the assumption, you create the budget, you create the budget and then you try to stick with that budget. That does not matter if your budget eventually might get wrong. That's why you have to run a sensitivity analysis. What I mean a sensitivity analysis? What could go wrong? What could go right? What could go absolutely wrong? And see that using this Sensitivity Analysis, if is your budget support a stress case scenario. If it does support, you move forward and you're monitoring the results, and then you start the business. Once we start monitoring the results of your budget, it's time to get the final results. What do we mean the result? You start to get accounting and financial results to check if your budget that you use as your assumption concludes or end up exactly as a financial result an outcome. If that does not happen, what you have to do is just recalibrate your budget and start all over again. So if we move forward, we will see that we have three main financial statements. The first financial statement that many of you must know and that we call Balance Sheet. It's important to understand that what we call Balance Sheet is just a picture of your company, is a picture of your company in that time and date. For example, December 31, 2016, your company is like that, it's just a picture. And you have assets and liabilities. What's the difference between assets and liabilities? Assets are considered to be the rights that you have to generate value for your company. And liabilities are considered to be the obligations that your company might have or acquire to generate value for your company. Always, assets must be equal to liabilities. That's one thing that's absolutely important. Why assets must be equal to liabilities? For example, let's suppose, a company is established to $1 million and one owner decide to invest $1 million in a company and you see that in terms of net worth, this is considered to be liability because it's the third party resource net worth liabilities. Once we establish $1 million as liabilities, because you owe that amount of money to a third party, you have also cash which is part of asset. That's why assets generate liabilities, liabilities generate asset. Always, assets must be equal to liability. That's why this is absolutely important, when you are going to establish, not only a budget, but when you're going to analyze a financial report. For example, when you say assets must be equal to liabilities, we will understand. Now, it might be a little bit awkward, but you figure out when you discuss about cash flow. For example, if one account of asset increase, either all the asset account decrease, or this asset account increase should in turn that lead to an increase in liability. I know, hold on. This sounds a little bit weird, but we will see when we discuss cash flow. Assets increase, liability should increase. Assets decrease, liability should decrease. Assets increase, other asset should decrease. Liability increase, other liability should decrease. Never, ever, ever, forget that asset should be equal to liabilities. That's when you end a balance sheet. Never forget, balance sheet is just a picture of a financial situation of a company. That's not the end of our financial report. We have the second one, it's absolutely crucial as well. Income Statement. Once we said that balance sheet is considered to be the financial picture of company, Income Statement should be considered the movie of a company, the movie, the financial movement of a company. What you mean financial movement of a company? Why do you understand that the Income Statement, or profit and losses statement, is considered to be movie of a company, a financial company, or financial performance of a company? For example, because you have Net Sales as the first line of Income Statement, that says how much your company sold during the entire calendar year. How much your company had, in terms of financial expense, during 365 days? How much your company acquire in terms of costs during 360 days to generate that sales. That's why we understand, that's very good explanation when you discuss about financial report. Balance Sheet, picture. Income Statement, movie. In the income statement we're going to have, Sales, Costs, Profit, Gross Profit, and then you move downwards. Gross Profit, we going to have Operating Expense, Administrative Expense, Financial Expense, Taxes, Payroll and you went up with the Net Profit. Something that you have to be very, very careful in the next video, for example. But the last one that I like to address, that what we call Cash Flow. Cash Flow is another financial report that we consider to be Crystal Report. Why is that? Because despite the fact that many of us, many analysts, many readers, many scholars understand it's properly. It's crystal clear and very important. Let's not forget, what could lead a company to go bust is Cash Flow. Because we will see later on that it might exist, company that generate profit, but does not generate cash. And cash, that's what needs. Why cash, that's what you need? Because if you're going to get loan from banks, it does not matter only that you generate profit. If you do not generate cash, you cannot get credit. I will advance a little bit. The difference between profit and cash. Let's suppose, you get an example, you sell a car for $1 million. It's a huge car. It's a very nice car, it's a Ferrari, red Ferrari, $1 million, right? And you decide to get that amount of money just in two years. But you pay for that car $500,000. We know that we're going to have profit, $1 million minus $500,000, it means you're going to have a profit. But what about your Cash Flow? You sold to $1 million. But where is your money now? Your money is going to get in your cash just in one year or even two years. You have profit but cash, zero. So be very, very, very careful. The difference between profit and cash and we will discuss in the next video. Stay with us.
