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Muni Bonds Videos 71 videos

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Finance: How does working capital...work? 1 Views


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00:00

Finance Allah shmoop How does working capital work Well you

00:08

had a vision a dream I hope that all mugs

00:11

would have their own voice their own personality their own

00:15

pathos their own swear word Well there was just something

00:18

about swearing phrases that grabbed you emotionally since well as

00:21

far back as you could remember And you think it

00:23

probably had to do with your earliest memories of your

00:26

mother swearing into the pain at your own You know

00:29

AIPO that's wearing lasted about four years until it finally

00:32

subsided when you left home for nursery school So every

00:35

mug needed a swear This one the fishmonger model said

00:40

And this one they road rage driver Model said And

00:44

of course well the bestseller here The med student reading

00:47

her student loan bill said Well how did all of

00:51

this get it started Working capital Yeah you didn't just

00:55

will the cups into existence You had to buy the

00:58

generic clay mugs You had to buy a kiln to

01:01

reheat them After you'd painted on your swear words you

01:03

had to buy that special paint He had to set

01:05

up a website through which to sell them You had

01:08

to deposit two grand into a bank account so that

01:10

you could take credit cards You had to do a

01:12

little marketing You needed shipping boxes and that corn Styrofoam

01:16

stuff that goes in and an upgraded computer from this

01:19

one Teo this one and a few other things to

01:22

get started Yeah so you needed that fifteen grand toe

01:25

Have enough dough to begin mugs your new company That's

01:29

capital to buy things But note that you're working out

01:33

of your garage for a while taking no salary buying

01:35

no insurance and setting up your own LLC through LegalZoom

01:39

for two hundred bucks So you realize that unless you

01:41

suddenly sell all thousand mugs for twenty bucks each and

01:45

make serious bank while you're going to need more working

01:48

capital in the very near future Note also that working

01:51

capital lives entirely on the asset side of the balance

01:54

sheet and it starts as cash But then that cash

01:57

gets spent on various supplies You know mugs kiln website

02:01

marketing so on And the cash in that original B

02:04

of a account dwindles to almost nothing By the time

02:07

the mugs is ready to go to market Well what

02:09

happened while it transformed into other lines on the balance

02:12

sheet like Well one line here Blank unpainted mugs Seven

02:16

hundred Yeah you only put swear phrases on three hundred

02:19

mugs to start and you're holding The value of those

02:21

mugs is being whatever you paid for them or book

02:24

value Maybe you'd get your money back if you had

02:26

to return A maybe you wouldn't Probably you wouldn't But

02:30

you don't want to test the system and the paint

02:32

and kiln and so on They're all held it book

02:34

value under the presumption that you could return them or

02:37

sell them if you had to albeit at some loss

02:40

but with no real info on what to go on

02:42

Well you just hold them in book value on your

02:44

balance sheet at least for now The rest of your

02:45

cash spent on things like marketing which just goes away

02:49

as soon if you commit to spending the money in

02:51

the period you'll run the marketing so that dough just

02:53

evaporates and well For the finished three hundred mugs they

02:57

become inventory And while you hold a blank mug five

03:00

bucks you hold a Finnish painted mug at seven bucks

03:03

as you attribute to dollars in value to the and

03:06

and you've painted on it And the mugs in the

03:09

process of being bleeped Well they're a work in process

03:12

sort of living in limbo between raw materials and finished

03:16

inventory goods ready to sell So all of this activity

03:19

has happened before you've sold a single mug but you

03:22

raised fifteen thousand dollars before then The question how How

03:27

did you raise that fifteen k Well you had two

03:29

basic choices Borrow the money like take out a loan

03:32

from the Bank of Grandmama or sell a slice of

03:36

your pie if you took out alone while you'd show

03:40

that fifteen grand is a dead on your balance sheet

03:42

over here is a liability alone payable And in this

03:45

case well let's assume it was all due to be

03:47

paid back a year or less after you borrowed it

03:50

You figured that well you'd either self mugs quickly or

03:54

you'd be well bankrupt and or you know mowing grandmama's

03:58

bond for years so that fifteen k lives is a

04:01

short term Current liability will presumably pay Feli off someday

04:05

with fifteen hundred bucks of interest that will have accrued

04:08

because grandmama charge you ten percent interest on the loan

04:12

per year to boot so well that'll be sixteen thousand

04:15

five hundred You'll pay in a year of that point

04:18

that fifteen hundred dollars of interests while you just add

04:20

to your debts payable in installments each quarter as you'll

04:23

see your short term loans payable go up by about

04:26

three hundred seventy five bucks and change about every ninety

04:29

one days So that's a loans way of raising cash

04:32

our working capital to start your company You could have

04:34

also sold Grandmama a slice or equity ownership in the

04:38

company for that same fifteen grand like let's say you

04:41

valued yourself is being worth one hundred thousand dollars to

04:44

start that fifteen grand in stock she would have bought

04:47

would then have been worth the fifteen over one hundred

04:49

fifteen or about thirteen percent ownership in your company Well

04:53

in this case you don't eighty seven percent and sheet

04:56

on thirteen percent and you'd be paying no interest well

04:59

because there'd be no loans Instead of the fifteen grand

05:01

of working capital showing up as debt it would show

05:04

up down here on the shareholder's equity line and just

05:07

hang out there as fifteen grand until told otherwise that

05:11

it should be worth more or less But yes of

05:13

course you have the cash as well in your B

05:15

of a account Right So that's a brief on how

05:17

working capital works at the inception of a company You

05:19

can imagine that if bugs took off and became huge

05:23

you need to raise more working capital just to meet

05:26

demand right Like what if orders for twenty five thousand

05:29

mugs came in off the website Well all of a

05:31

sudden you need to buy another twenty for thousand mugs

05:34

at five bucks each and while there's another hundred twenty

05:37

grand alone's you ask for the mugs let alone all

05:39

the other supplies you need So yes it's great that

05:41

you're selling twenty five thousand mugs that say twenty bucks

05:44

each for half a million dollars in revenues but you

05:46

don't collect that revenue entirely Half the orders were checks

05:50

that were mailed in They take a while to clear

05:52

in cash and so on And you know the five

05:54

percent will return the bug with email that says this

05:58

is not what I ordered so you need more working

06:01

capital as your balance sheet expands and you need to

06:04

be ableto handle the scaling up of your little company 00:06:07.75 --> [endTime] into a you know a big one

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