[MUSIC] Now, we said, if you remember that the diagnosis of the problem is that as we grow in sales, the growth of need of funds for operations is bigger than the growth of working capital. And you ask me, but what is it? What is this need of funds for operations, and what is working capital? Now, let's go into that right now. So need of funds for operations, do you remember what the balance sheet looks like, right? We'll be talking about balance sheets for some time now, and if you did the course of Marc Badia in accounting, making sound decisions, you've gone very familiar with the balance sheet, right? Let me just give you a quick reminder of what it looks like. We have in the asset side, basically fixed assets that are able to produce machinery or whatever. And then from those fixed assets, you were able to produce some inventory, the inventory gets converted like you sell the inventory and then gets converted into receivables. And then, at some point, the clients actually pay their bills and then you get that receivables in cash, right? That's the asset part. Now, in the liabilities part is the sources of funds, like where are you getting the money from, right? You have your own pocket money and the shareholders, then you ask for long-term debt. And then you ask for current liabilities, which is basically you'd pay late to your supplies. Instead of paying in cash, you are paying with some delay, then you're getting some credit from the bank. I put there a credit card, but it's basically, it's very similar to a credit card, a credit from a bank in the company. And then, you get also some other current liabilities like taxes that you owe the government. Now, when we speak about need of funds for operations, we basically mean that those are the funds required to finance a company's operations. So every company out there is operating, and by the fact of operating there, you need some financing to operate. Why? First, because you don't sell directly what you buy. It's either you buy some stuff from your supplier, you don't sell it directly. You normally keep it in the warehouse sometime. So buying something and keeping it sometime, you are in a way, paying money to your supplier, not receiving any money from client. So you need money there. Again, if you said something to your client and the client doesn't pay you, then again, you need to wait until the client pays you to be able to have some cash. So inventory and receivables are two items in the balance sheet that have to be financed, that require financing. Now, you would say, okay Miguel, but you said that you have to pay your suppliers, and actually, you are paying your suppliers in 30 days or 60 days, and you are right. So the need of funds for operations is not just receivables and inventory, because part of this operations are being finance by the operations that you have for your supplier. If you pay late your supplier, the supplier is actually financing some of your short-term operations. That's why we define need of funds for operations as receivables plus inventory minus payables, which is in a way, the net need of funds for operations once you have accounted for the payables, right? Now, this term that is not very common out there actually means that it is a use of funds. In the sense, there is a need. Because there's a need of funds, it goes in the asset side. It's something you need to finance. You need some money in the liability to finance that part. And then on the other hand, it's very important to know about these term, because it's as important as the fixed assets. So fixed assets require some strategic decisions from the management, but NFO requires decisions, what is the collection, policy, payment, and those have a strong impact on a balance sheet. An asset side of a balance sheet can be actually the finance fixed assets and need of funds for operations. Now, and then one more thing is that NFO, need of funds for operation, are directly related to sales. You see here, the receivables plus inventory minus payables. Receivables depend on sales, inventory depends on sales, and payables depend on sales. So need of funds for operations are going to depend on sales. Sales grow, NFO is going to grow. If sales shrink, NFO might shrink. If NFOs are stable, sales are stables, NFOs will be stable. What about working capital? Well, working capital is basically the long-term funding that is left over to finance the operations once you have finance the fixed assets. Let me put it in other words. You have it in the liabilities side, you have long-term financing, which is the shareholder's equity plus the long-term debt, right? With long-term financing, you finance long-term assets, which is fixed assets. After you have financed the fixed assets, there's some money left. That money left that is used to finance the operations is called working capital, because it's capital for working operations. This is what we define working capital as, the long-term financing, equity plus long-term debt minus the fixed assets. And now, if NFO was the usage of funds, working capital, as they work capital, it says, this is a source of funds. It's in the liabilities side. And if NFO is greater than working capital, we need to ask for credit. And if NFO is smaller than working capital, we have extra cash. [MUSIC]
