[MUSIC] This turn out to the days of payment, which is very similar operational ratio to the other two. Now the days of payment In a company, it relates to the stuff that we bought from the suppliers, right? If you look at the balance sheet, but now instead of looking at the asset side, let's look at the liability side. Now there is a free source of financing there. What is the meaning of these 400 and 162? Both of them are suppliers, as we agreed. One of them is a promissory note with a strong legal implication. That is a box of invoices that we haven't paid our supplier. Because we haven't paid yet, this is free financing for us. The longer we pay, the later we pay, the better for us. Because we can use the cash we have in the company for other things, right? Now, the days of payment is very simple to define. It's the number of days I take to pay my suppliers, right? Or in other words, what I have in payables has been bought from my suppliers in the last x days. As simple as that. Now examples again, if my purchases are 200 a year, and I have 15 payable, do you agree that what we would have in days of payment is a quarter of a year? Or in other words, 90 days, three months? It's simple, right? The structure and the intuition is the same as before. But instead of taking daily sales or daily COGS, now we are taking purchases because the payable are related directly to the purchases we make to our suppliers. Changing the example ideal with my purchases are 360 a year and a pay my supplier in 30 days. That means that what, how many euros would I have in the payables? Well, if 360 a year, I would have 30 every month, right? So, 30 euros in payables. Is it a way to put out intuition in a formula? Again, as before what we're doing is basically knowing that would having payables is a stuff that I bought that i haven't paid. And the way of relating the two things is we're comparing what we have in the payables with what we have in purchases. So if my daily purchases are x and I have in payables x, that means that I take one day to pay my suppliers, right? So the formula is very similar to the other ones, but instead of having daily COGS or daily sales, I have daily purchases. Very simple, right? Now with the example before we said a quarter of a year. A quarter of a year is 90 days. I'm going a little quickly now because you're used to it from the previous two examples, right? Now, let's turn to the Polypanel case. And you see I have purchases of 2,179 and I have 400 plus 162. We compute the formula, it turns out that I am paying in 94 days. Do you see now why our suppliers are angry or not? I mean in the contract with our supplier we agreed on 60 days we are paying in 94 days. Does he now make sense to you to find a promissory note in the balance sheet the last year? It does make a lot of sense, right? Actually, we compute what happened over the last few years, it turns out that we started pretty well. In 2004 we did 62 days, right? But then we moved onto 73, onto 86, and now we're in 94. So no wonder that they are angry, right? This is crazy increase of days, right? And that has a big impact on the financing needed. Again, instead of you cannot catch, we look at purchases. What are the daily purchases here? Well, if each extra day of payment is 6,000 euros, right? Now, if our delay has been from 60 to 94 days, it's 34 days extra. So, 34 x 6 is 204,000 euros. But be careful, in this case is not extra need of finance. In this case it's extra free financing cause the later we pay, the better. So we're getting extra 200,000 euros extra through finance from delaying payment to supplier and the supplier is actually getting nervous, right. So what is the impact in the balance sheet. So if we were to pay them, look this is completely at the inverse from before. You have the balance sheet here. If we were to pay our suppliers, instead of 94 days, in 60 days, instead of having here 400, we would have here 196 so much less financing. Now that means we should get the financing from somewhere else. From example from the bank. So we should ask the bank for 204 more euros of credit which means we would have there 514 euros. Now what is the learning here? Not just the formula, but learning is very similar to the revenues in the days of collection and days of inventory, right? But there is one specific feeling the days of payment, which makes a little different from the other two operational ratios. Which is we're using purchases. Now if we do not know the purchases, how do we compute purchases? Well, it's very simple. They are related to the inventory. So what I have in the inventory at the beginning, plus my purchases minus the cost of good sold would be the final stock. If you rearrange that formula, you would get the purchases in that year. However, for simplicity throughout this course let's, just take purchases lets just take COGS. Normally companies tend to buy what they're going to consume that year, right? So even though it's not exactly the same number, let's assume that we take COGS in our future calculations, right? [MUSIC]