To next set of ratios now we would be

looking at are called activity ratios so before we jump onto these ratios will have to build certain background for understanding purpose so what we

have already seen is that assets we can broadly categorize into

two segments non-current assets and current assets and current assets are those assets that we can can convert within cash convert in cash within 1 year or 1 operating cycle which ever is longer so generally current assets what

could be those categories the first and the most important one in current assets is inventory the second category of current assets would be accounts receivable accounts receivable are also called as debter then we also put cash and cash equivalents what would be cash

equivalents if you have some excess cash for seven

days instead of letting you can use you can

put that into money market funds it's a very very liquid short-term

instruments they would be called as cash in cash equivalence okay so now let us build perspective on certain concepts

anything that you can convert cash within few hours is cash equivalence and which will not fluctuate in value

significantly so let's say you're starting a new business and you have decided to invest 1000 into your new business this amount

of money invested into business we would call this as capital and this we could raise either in the form of equity or in the

form of decked equity means owners investing that amount that would mean the amount is borrowed from bank or financial institutions now how do you put this amount to use so let us say you divided this 1000 into two parts the first 700 you decided to purchase a piece of

land may be construct building and then set

up your factory with all the missionaries ok.so that 700

was invested into having your set up ready that 300 you decided to keep it in cash now my

question to you is why do we need to have to 300 in cash to take care of day to day expenses so then that 700 we would say is an investment in to fix capital or fixed assets where as this three hundred is an

investment into working capital so that amount of

money that you kept separately so that you can do or operate on a day to day basis that amount we would called as working

capital now what are we going to do with this working capital so let us say out of

300 so we have 300 cash right now so out these three hundred we decided

to purchase inventory of 100 the movement you do that your cash is how much cash is 200 inventory is 100 we will say your working capital is still 300 but it is but it is divided into two parts 200 into cash and 100 into inventory now let us say you converted your inventory into finished goods and you sold some amount of it so now

you are left with inventory of only 50 and you have another 50 with account receivable that inventory was

converted into finished goods it was sold to the customers and now

we're supposed to receive 50 from them now we will say that you're working

capital is still 300 but it is divided into three parts some

part in cash some part in inventory and some part in account receivable so can I then say that working capital is equal to just a minute working capital is equal to cash plus inventory plus accounts receivable are you an

agreement here now see what happens don't write for a

minute be focused here let us say next day you come across a vendor who supplies row material and he agreed that that he will give you row material worth hundred or inventory worth 100 on credit

okay now let's take total of this side how

much would that be 200 plus 150 plus 50 what is the total 400 so can I now say working capital investment is 400 did I invest 400 into working cappital now how much you invest 300 but your total assets on this side

is how much 400 but out-of-that 400 this 100 is not your investment this

is invested by your Accounts Payable isn't it the one who

gave you credit inventory on credit so you have

accounts payable of 100 and therefore what we will says is your formula is cash plus inventory plus account receivable minus Accounts Payable because some part of

the inventory would come from accounts payable isn't it and generally these 3 assets collectively we would call them as current assets and this particular liability we would call this as current liability and therefore the formula that working

capital is equal to current assets minus current

liabilities are we fine with this so write down quickly I'm open to questions if you have any

doubts yes any other doubts any questions ok let me answer the first one what if there's a short term loan okay

so let say you go to a bank and typically we will call is working capital funding okay so let's say you have taken a short

term loan of 150 now the moment you take a short term loan you cash balance will increase correct so and short term loan is nothing but a

part of current liability so this Accounts Payable and short term loan both of these are considered as current

liabilities so the effect would be same it will increase your current assets it will increase your current liability there for you looking capital will

remain intact okay second question he asked he said,,, what did you say can you

come back please anything we take from creditor it gives us stipulated time to pay it back fine haha correct yes yes it can not be the same is absolutely

spot-on wonderful what he said is let's say that when you buy goods from

raw material supplier so to give you practical examples if you

would go to Dharavi in Mumbai those people …Dharavi is turning out to be a really large market for a lot of luxury bans where they at

manufacturing leather a goods so leather bags, leather shoe

because a lot of workers would produce that handmade type of material so let us say that there is a leather shoe Supplier he's buying the

goods from those Dharavi Gottesman and his taking a credit of two months and intern his selling those goods to different distributer or retail branch so the Idea is that if need to make

payment within two months to your suppliers ideally you should give the credit of about one-and-a-half month right so one and a half months time your customers will pay you back you take that money and you give that to the supplier and you keep on rotating cycle now

what if temporary there is a — where one of your customer is not paying if that happens then you go to a bank to

people like these and then you request them see I have

some short-term crisis so can you fund me for a few days so that I will make payment to my suppliers and once I received my payment cycle will start rotating again thats thats a radio finance where lot of

people get jobs that's called as working capital management so now let's look at practical application of this so let's say Pragya wants to go out shopping and there are two locations that she's going to chose to

destination the first one is let's say Tulasi Baag Pune you know this place so it's kind of market where you can a negotiate buy goods so this is a first location the second

location is let us say Zara Outlet so these are the two destination now what she wants to do is she want buy let's she wants to become wondrous so

she goes to the Tulasi buag and to chose that one dress she goes to that shopkeeper and she keeps on asking him to show different variety of dresses

and till the time she's not completely satisfied she's not going

to buy one so to buy one she decided or she saw at least 50 units of those dresses select one but when she went to Zara outlet they were limited number of designs on

display maybe ten of them so she looked at those 10 and then she decided maybe this one 1 I like so she saw 10 units and she picked up one now see this is an intangible benefit

of being a brand so off course we know that larger benefit is people will trust

you they will buy they will pay your highertries but one of the higher amount but one of the intangible benefit is that when you're a big brand specially

in retailer segment you are not required to have a large amount of inventory on shelf do you agree with me so who's doing smarter job is lasi baug storekeeper or is it Zara stores which is doing smarter job Zara because by storing less inventory they're being able to churn out higher amount of sales so now what is happened throughout the year again the same example so this is Tulasi Baug and this is Zara throughout the year total amount of inventory sold number of units sold

both the stores is 1000 and 1000 okay so this is a total

number of units sold but average inventory in stock at any point of time that means that means any point of time how much inventory you have in stock so lets say with Tulasi Baug it had 500 uints on stock where as Zara store had only 100

units of stock so by looking at this what we will say is that Zara is doing a better job because at any part of time only 100 units of inventory both of amount is blocked into working capital are you an agreement and then we calculate ratio we will call this as inventory turnover ratio an inventory turnover ratio is the simply the number of units sold divided be average inventory so much would this be 2 and how much would this be 10 and which one would be better 10 which means we would say higher the better that I'm fine with this====== and how did we define did a show that

issue was defined as: total number of units sold total number of units sold divided by average units of in Mantri in stock so no need to say I give you a news

report of when of the companies selected in the Sun Unilever will you be able to cope with this

issue's if they give you a new report of Hindustan Unilever will you be able to

calculate this issue yes or no ok if I myself open the annual report of in

the senate liver will I be able to cope with this issue using this formula yes or no no connect because what we feel are nor is what is the total number of units

sold at that data will not be available

Hindustan Unilever to be locked away to set it up a bit how many number of locksmithing buys

have sold in this particular isn't it what date that would be

available is what is the total amount of good sword that means we will have

detained amounts not quantity so we took and what this issue into

amounts a 2-1 bill doing it this what we can do is begins here might be

played wit ok and so going right now in the

numerator say let's play baseball unit and the in the denominator costs place

body in it is a fine is a fine yes or no no because you might be playing at a show

bit different value in the numerator and different value in the denominator the show will change so to keep Today

Show same you numerator and denominator has to be

seen which means we will make the play this also whipped cost race by unit I'm

paying to bed at the farm refuse to understand into shit so when you said

number of units sold in due course place by you need what is

this value yes this is nothing but cigs so number of units or into cost price

per unit e cigs an average units in DAW stalk into cost

price per unit is nothing but average and maybe on the balance sheet at this

is your farm lane among if I had kept this total quantity: into

place then what would have been the numerator

numerical to become purposes quantity sold: into price per unit bike daddies and maybe do not take see

it in the numerator because we want to keep their tissue

intact so the farm lacy or GS a divided by average in mentoring ok

fine you so I don't quickly now let's look at the practical

application of this concept if a business in a politically it has been able to

sell 1000 units but on average it stored only 100 units

what of inventory then how did manage to do that what did

business mister bennis that it it purchased inventory of 100 get dick for a few

number of days with itself and then sold 100 and immediately

purchase 100 then again get big with few days for

itself sold 100 immediately purchased 100 and

this process the business my service repeated how many thanks then thanks so that your total sales comes out with

house in but operation went to a concert to be only 100 average inmate becomes ok to be 100 now home in 10 days this must be to

ensure that this issue is intact if you're repeating this process 10

games in the hood that how many number of days they should

be they should be treated 615 this panic so you by in 20 on day 0 give back the dual give directly to do

not do anything for 100 this Saudi on 36 15 dates i dont 36-point

fifth day sale 100 by 100 then repeat the process

again on 36 150 so in this fashion your cycle will be to

predict and NCR your purposes were big house an

aberration meant it would be 100 so this 36 15 is quite a number of

days in inventory at interpretation is on average you would keep inventory with you for how many days and the

family of calculation would be 365 divided by in Raintree don't know what racial I

refined with this said I don't quickly number of days on basin in Mantri is equipped to 365 divided by inventory turnover ratio up up I'll be okay to a general rule of thumb higher than

12 title additional baby Davis I def inventor dunno issue is hired

which means number of days in enmity would be

lowered that means you are more efficient with

management of inventory is a fine now imagine a scenario so this happen with me I think this is 2010 for a fair don't remember exactly a but

I wanted to for make a very important presentation

in my office and I was all excited so I decided to

buy new shoes new cloths everything possible

use so that the presentation goes well and I decided to have a new laptop for that particular

presentation so I went to Adele Ochlik and a the I had to make that

presentation about seven this same striving toward a shuttle a goal in that

I want to buy a particular day before laptop and what

they told me is fine you makers a beaming your laptop would

be available after 15 days from now this have a

surprise as to why fifteen days an electron min a did some research

ideal a stake building does this they'll use to operate on zero in winter

system to once down mount is paid to the company then

they would make give in order to the lets it all

materials supplier in China maybe then there's some new in stock and

then the units will be shipped to India and then it would be delivered to you okay which means Adele must have had

really large among the filmmaker darnell initial

because they're almost not starting any inventory but

they're making large amount of sense but what happened is since I wanted to

buy that laptop be magically I decided to were some other random

purchase a laptop which means higher than 20 dunno to a

sure bet that it is but not at the cost of losing seats a if you have kids you would experience

a simple new markets typically the school uniforms season is so maybe not applicable to most a few but school

uniforms season is which months many would want to buy uniforms for the

school this issue lay in August now I know

certain shops in Pooler a vet you work with them at any part of

the earth rodier and you'd see that they have large

amount of in 2011 for the school uniforms now the business model is been ordered

lot of other stores will not stored in many people as the season gets a little

and they're always something personal the people know for some reason they would want to

buy uniforms in the month of October November December so then you go to the shops and then

they make substantially higher democracy is because they're starting in 20 so the idea is that these stores will

have a blessed in return Alicia because this would enlarge in maine bhi but this is would be hired and that's

where be job of an analyst are you when I come

in that we have to optimize as officials

for the company you have to optimize and issue in such a way that an internal issue is highest but

you're still not losing money on this is opportunity ok fine with this

# Finance for Non-Finance- Activity Ratios- Part I (of 2)

11 months ago
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