[MUSIC] You might say, well, Miguel, I'm getting a little confused. Don't worry, it'll be okay. We'll just clear it out with this very simple example. Super simple balance sheet. See, imagine that you have in receivables 10 euros, inventory 5 euros and in fixed assets 10 euros. And you're financing that with basically five euros of equity, ten euros of long-term debt, five for credit and five of payables. All clear here? Now, let me introduce here the concept of NFO. If we introduce here the concept of NFO which is receivables plus inventory minus payable. And we shrink the balance sheet to a simpler version of the balance sheet. We would get basically NFO which is receivable plus inventory minus payables which is ten and fees assets in the asset side. You need to find operations and you need to find fees assets and again the liability side would you going to have is equity long term dead and credit, right? You see the payables this up here because they are taken into an account in the NFO. Now, if we now introduce the concept of working capital, then working capital is basically equity plus long term debt minus fixed assets. You'd see five plus ten minus ten is going to be five. So you will end up having basically NFO and you will finance the NFO with the working capital. Again, the working capital is the capital that is left after you have financed the fixed assets. As we've learned in equity, you finance the fixed assets and you are left with five. Those five are working capital, capital for working operations. And you use those five to finance the NFO. But it turns out that the five are not enough to finance a ten so that's why you have to ask for credit. Now, some of you, not many perhaps not you but perhaps you, right? You say well in many textbooks actually they're telling me that working capital is the finance current assets- current liabilities. Then why do you define it differently? Well, let's see, right, let's see. With current assets- current liabilities if you look at these current assets, this current liabilities. And we take the difference, it turns out that is exactly the same as my definition that the number is the same. Then why do we define it differently? There are two main reasons. The first one is when you look at the definition of working capital equal to current assets minus current liabilities, look at the words there. It says assets. When you see assets, minus liabilities, you might tend to think that is an asset. And as we said, working capital is capital. It's not an asset, it's a liability, it's a source of funds. And then, if you keep looking at the formula, you'll see there another word that says current. If you see something current minus current, you tend to think that it's current or volatile. And actually working capital is pretty stable. The source of capital equity but plus long term debt minus equity minus fixed assets do not change that much. So it's pretty stable. What changes a lot with sales and with see that's high goal and with seasonality is basically the NFO. Now, once we have understand, that we have understood pretty well, what is the working capital, and therefore, we should go back to the diagnosis of the problem. And with this little theory that I just gave you, we would be able to go back to the diagnosis at the beginning. Which is that NFO is growing faster than working capital. And this is what we're going to see in the following clip. [MUSIC]
