[MUSIC] Let's move on to the second clip of this week which is try to understand why they need more and more credit every year, right? Which is what we just saw, right? There is an increased need of credit every year. Now as you realize from the conversation we just had with the people in the bank, it's not clear why they need more and more credit. They were discussing a little bit, and we're going to try to help them out to understand why they need more and more credit. Well, one of them was saying that Is because they do not control costs, but is it really true? The other one was saying like, well, they're delaying the days of collection, and this is true, right? The other one was saying because they are not profitable enough, they are not making enough profits. The other was saying no, they have grown too much. And the other was saying actually well, they do not grow enough to be able to finance themselves. Or the others have said, you know, there is a deterioration of the operational ratios. Now almost all of them are right in the things that they are saying. But so how can we distinguish which is the correct diagnosis of the problem? Coss, It's you again. >> Crow, again! >> How are you? >> Long time. Good to see you again. >> So did you give the credit to these guys you told me or not? >> Yeah, thank you for teaching me. I did everything you told me, so we got the better, but then after we analyze, we find out [CROSSTALK]. >> But did you do the forecast or not? >> We did a forecast and we found out that they need more and more credit. >> So they every year need more and more credit. >> Exactly, exactly and why is that? >> That's what's something we have to find out. >> But did you ask your team or not? >> Yes I did, and they came up with different reasons, but I just didn't know which is the most relevant reason. >> But you need to find what is the main reason, otherwise you cannot make a decision right? >> Can you help us again? >> Yeah, we need to make a clear diagnose of. Come with me we'll do a clear diagnostics of the problem. >> Thank you. [MUSIC] >> Do you think it is clear that they've been delaying payment and delaying days of collection, right? The operational ratios have been deteriorating a little bit. Let's see if that is the answer to their question. Let's see if the change, if the deterioration in operational ratios is actually the problem that this company has. If this the reason why they need more and more credit every year. As you remember days of collection were at the beginning 70 for collection, and then they went up to 81. Now for inventory they started with 102 and went up to 80 and then days of payment went from 62 to 94. Now the balance sheet in which we see that there is an increased need of credit is a balance sheet done with the most recent policies, which is those ones, 81, 80, and 94. Now as you can see, if we do that then we get an increased need of credit. Now you might ask what if, in this case we're getting, as I said an increase need of credit. But what if, instead of using the deteriorated ratios, we were to use the correct ratios, or the initial ones we intended to have at the beginning. If you remember this is the one we just did right? Instead of using that one we were to go back to the good ratios, by good ratios I mean using for collection. Do you remember it was 60 for many costumers, 90 for some costumers, so we agreed on 70 which was the days that we had the first year, right? The same for inventory. Instead of 80 we should be in 60 and the days of payment instead of 94 we should be in 60. So if we do the corporation averages correctly, do we actually solve the problem or not? Let's see, this is the balance sheet before with the worst operational ratios, so that you remember, right. We had this problem in which in March, more or less 2009, we're going to be over because we are 598 on the second year. Now what happens with the good policies? If we change that numbers in Excel and then I show you exactly how the balance sheet looks like with the good policies. This is what we find. Now what do you see? My god, right. You see that actually that does not solve the problem, right. I mean, we have an increase need of credit every year. Suddenly 438 the first year, and then 557 the second year. So if they don't call in March 09, they would call in May, June? So if even with good policies, the problem seems to be there. Then, what is it? Where is the problem? Why does this company need more and more credit every year? And the company that needs more and more credit every year is probably in a way not sustainable. Right? It seems like this is not a normal. We could say not normal, cough then you go to a doctor and then you are sneezing. And then it's not just take one pill and that's it. No this seems like there is more a little bit of a structural problem here, right? Now, what is it? Well, the structural problem that the company has is that as we grow, the need of funds to operate are growing at a faster pace than the working capital. But you will say, okay, what do you mean? What is that, right? What is need of funds for operations? What is working capital? And this is what we're going to see in the next clip. [MUSIC]
