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

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 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

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