[MUSIC] Let's see for the case of. See in 2008, the projected ROS is 1.7 and the projected interface as a percentage of sales is 20% of sales. So if you compute this sustainable growth, it's 1.7 over 20-1.7 = 9.3. Now, we can only grow sustainably at 9.3% and we are aiming at a growth of 25% which is way bigger than our sustainable growth. If the company does nothing this is all we can grow, but if we want to grow at 25% is not so sustainable. See that if we increase prices, as we said in the action plan the most important thing that we can do here is increase prices, we're going to have like two effects. They see mine this is really interesting. The first effect is that by increasing prices, you're going to increase the ROS. Agree, so by increasing the ROS. You're going to increase this sustainable growth for this company. So instead of nine we'll going to have something much bigger than nine like ten, 15, 20, 25. Depending on how much we grew spaces. On the other hand, if increase prices we going to lose some customers, so real growth is going to decrease a little bit, so instead of growing at 25% we maybe able to grow 23%. So do you see by increasing prices you are actually. This was the sustainable growth before, and this was the real growth that we were attaining, right. By increasing prices, the sustainable growth is going to go up and the real growth is going to go down, because of loosing some customers. To a point at which we are going to be able to have a real growth that is sustainable. For example, let's just give an example. If we are to increase prices 3%, this is what would happen in the P&L. Look at this carefully. You have the P&L in the first column, we do nothing and this is the forecast for 2008. As you can see in the bottom line, or profit is 60 and the return on sales is 1.7%. Now if we increase prices by 2%, do you see that COGS do not change, transportation and commercial expenses do not change. Salaries and overhead do not change. The only thing you are doing is changing the price of the products. So it turns out that an increase of 2%, you go down to the bottom line and you see that the gross is changing from 1.7% to 4.5%. So if you increase the COGS, not the COGS or if you increase the prices 3%, only 3%, the new sustainable growth is going to be 29%, this is crazy. This is crazy, we would be able to grow a 29% of the most instead of 29 we'll maybe able to grow at 24, 25, 23 that we would be much better of. Perhaps we don't even need to increase prices 3%, we maybe able to increase them 2.5%. Now, with this sustainable growth the conclusion that we get here is that if we want to grow without financing you need to make money. You need to make enough money, right. If you need to grow, you need to make enough money and for this specific company the margin is too small. I mean 23% it seems to be too small, I don't want to give you general rules because every industry's different, every company's different. But in general, typically a commercial company that is really big in big sales like Walmart or El Corte Ingles in Spain or many other companies have a margin, a low margin 15%. Why? Because they are so big and they sell so much, that with little operational expenses, they are able to produce some profit. Now small retailers on the contrary, they need to have a higher margin of 25, 30%, because they have to bear bigger operational expenses as a percentage of sales. A manufacturer company even more because they have to invest in machinery and capex and deprecation of the fixed assets, right. By generally the best thing to do is when you look at the gross margin of a company, compared with the industry. Because then you will get an idea what's going on. Even some industries as a whole sometimes might get too low of margins because they are competing too hard and the profits of the whole industry are too low, even negative sometimes. So with this, we're done with the sustainable growth part in which we just saw, what it means to be sustainable. We just saw that a company can grow sustainably at a specific point. With this formula, we saw that the growth that is sustainable is ROS over NFO minus ROS. We saw this company if they do nothing, they can only grow 9%, 9.3%. If they change something with the action plan, if they change prices, then they will be able to grow at 29%, which is a lot. It is a very important concept, because you can apply it to your company or to your clients, or to an exercise that you might be doing. To understand how much the company can grow without the need of without the extra financing from third parties from the back, just with your own profitability, right. So the conclusion here is that you need to be able to generate enough cash to finance your own growth. Or in other words, growth is not for free. [MUSIC]
