[MUSIC] Okay, so welcome back to the next clip where we're going to see 0.5. As you recall, what we did in the previous sessions, we looked briefly at a business analysis, where we saw what the business is about, all these Polypanel Company with Mr Lichstein that sells panels. Then we went onto analyzing the P&L. Now what we are about to do is analyze the Balance Sheet. If you recall from the previous session, the order Of analysis that we saw that was convenient was the answer to the question to my mom of, Mom, I started a business. And then what are the questions that she would ask? If you recall, the first question that she asked was, what are you doing? And this is what we did when we did the business analysis. The second question that she might ask, is it actually profitable? Are you making money, son? And then the answer to that question was to look at the P&L, or the income statement, which is what we analyzed in the previous clip. Now what we're about to see now is the third question which makes sense. Your mom asks you, how much money do you need from me, son? How are you financing this business? The answer to this question is to look at the Balance Sheet. So before we move on, I think it will interesting to have a recap of what the Balance Sheet means. The definition of a Balance Sheet is the statement that has the financial situation of the company. As you know, the financial situation of the company is broken into two parts, assets and liabilities. Now what do we have in that financial statement? Well, I want to speak of it now generally, not just for the case of Polypanel, in general. So in both sides would you have It's in the liabilities you start a company by putting some money. That money comes from somewhere, right? Either you put it from you own pocket, or you get your friends or some family, or whoever wants to be a shareholder, someone that owns the company puts some money. So that will be your own pocket and a bunch of shareholders. Now, on top of that money, that money might not be enough to start a business. So, what you do is go to a bank and ask for a loan to run the business. Then you go to the bank and you get a loan. Now, what do you do with all that money that you've got from your own pocket, and from the shareholders and from the bank? Well, you go and buy or build a factory. Which is, what are you going to do with all that money, it's going to be on the asset side. And it could be a factory. Now with a factory, you're going to start producing and having some inventory of finished goods which is going to be something else that you will have on the assets side. You have to finance all the inventory, which can be raw material, finished goods, or a work in progress. Now as soon as you start the operations, and you start selling the stuff, you're going to receive the money from the customers if they pay straightaway. But if they don't pay straightaway, you're going to give them an invoice and they will pay in the future. So you will have a box full of invoices that are still unpaid, and this is an asset that has to be financed. But once the clients actually pay their invoices, those invoices will be converted into cash. Now with the operations of the company, you need some short-term financing as well. And it makes sense that sometimes your customers take some time to pay you. At the same time you, as a company take some time to pay your suppliers, the ones that are selling you the raw material. And this is as if the suppliers acted as a bank for you, so they are lending you money and you owe them money. And this is what we call the payables. Now, there are some other people to whom you actually owe money. One of them is the tax authority, the government. You have to pay some taxes, but you don't pay the taxes straightaaway. So if you owe the government some taxes, that's some source of funding as well which is in the right-hand side of the Balance Sheet, which is the taxes due for that year. And if there is still some money that you need, that you have a shortage of money, you can go to the bank and ask for a credit, which can act as a cushion when you need some money in specific periods which would be credit, like your own credit card. Now as you can see from both sides, liabilities means where the money is coming from which we can be called as well the sources of funds, and assets is where we're using the money, what do we have. And this is the uses of funds, right? As we know, because it's called the Balance Sheet, it has to be balanced, so it means that both sides have to be equal, right? Now we put all this stuff together in bunch in the asset side, and in the liability side. But there is a little bit of distinction, there are different parts within each part. So in the assets side there are two main different parts, one that is long-term and the other one that is short-term. The one that is short-term we call them current assets, which is basically assets that will be converted into cash and are more liquid which is the inventory, the invoices that are still unpaid, and the cash. But then there are some fixed assets which are long-term and they are not converted to cash and normally stay there for longer, 10, 15, 20, 30 years. And those are called non-current assets or fixed assets. Now in the liability side, we have a little bit of the same, something that is long-term and and another part of it is short-term. The short-term liabilities are called current liabilities, and analogously to the asset side, we have suppliers, which is payables. Then all the payables or all the short-term liabilities, like the tax authority and then the credit, this is current liabilities. Then we have long-term liabilities, which is the money that the bank gave as a loan. And then finally what we have is the equity, which is the capital that shareholders actually put in it. Now with this in mind, as a refreshment of what a Balance Sheet looks like, we should go deep now into analyzing the Balance Sheet of Polypanel. Don't forget that the main objective of analyzing the Balance Sheet is, if you go back, is to make a sound decision from the bank's perspective on whether we give a credit to this company or not. [MUSIC]
