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Finance: How does working capital...work? 1 Views
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Transcript
- 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
Full Transcript
- 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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