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Principles of Finance Videos 166 videos

Principles of Finance: Unit 1, Company Formation, Structure, Inception
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How is a company... born? Can it be performed via C-section? Is there a midwife present? Do its parents get in a fight over what to name it? In thi...

Principles of Finance: Unit 1, Intro: Company Formation, Structure, and Inception: Unit Intro
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Company Formation, Structure, and Inception: Unit Intro. Sorry, Leo DiCaprio fans—we're not going to be breaking down the plot of Inception. We'r...

Principles of Finance: Unit 1, Alex, That’s Finance Potpourri for $500
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Okay, so you want to be a company financial manager. It's basically up to you to make money for the shareholders. It would also be swell if you mad...

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Principles of Finance: Unit 4, JIT Inventory, Capital Management and Inventory Turnover 7 Views


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Description:

JIT management, capital management, and inventory turnover, oh my!

Language:
English Language

Transcript

00:00

principles of finance a la shmoop just-in-time inventory capital

00:06

management and inventory turnover well this is old school this is new school [scissors cutting grass then a lawn mower]

00:13

and yet new school is usually better now let's think about the just-in-time or

00:18

JIT world versus the old-school way of doing things in old school inventory

00:24

management you know for a factory a division of the company might have [writing on white board]

00:27

dedicated five thousand units times four hundred bucks each equals and about two

00:33

million dollars in tire inventory and yeah those are kind of expensive tires

00:37

couldn't that capital be used elsewhere well in the JIT way the capital needed

00:41

for inventory was miniscule just a few tires here a few tires there refreshed [tires spinning]

00:46

every day what happens if the inventory of tires runs into a mountain pass no

00:51

Starman can't be refreshed daily yeah JIT only works when it works really well

00:56

you could imagine the enormity of the cost to the manufacturer of cars if the [man driving truck]

01:00

production line ran out of tires suddenly cars back up on the line and [production line of car bodies]

01:04

there's nowhere to store them or even move them because well they have no

01:07

tires then things back up more and more and let's say there's a run on rubber

01:11

supplies and the company can't get tires for a month while suddenly sales to the [calendar]

01:16

consumer there and the auto dealerships get cancelled and consumers buy another

01:20

brand or make of car from another company or a competitor in fact it was a

01:25

lot of this fear of supplies being cut mindset that created the quote over

01:29

inventory unquote status that US automakers had in the 60s and 70s the [vintage car factory footage]

01:35

children of world war ii knew very well that nothing was guaranteed and they [children marching]

01:38

slept more soundly at night with 5,000 sets of tires in the garage but you know [garage full of tires]

01:44

imagine what you'd do if milk was available only once a week for you as a [girl with a single cookie on the table]

01:48

kid but the economies of the world grew up the distribution of commodities grew

01:51

more global and liquid and supply lines just stopped getting cut in a world [writing on white board]

01:57

generally at peace not at war anyway one key metric commonly used to assess the

02:01

efficiency of capital use in companies that particularly in factories or

02:06

manufacturing plants is the inventory turnover ratio for most companies this

02:11

is a rel and not an absolute number that is one

02:15

auto manufacturer can look at the turnover ratio of another and compare [car being compared]

02:19

how they're doing relatively auto manufacturer really can't look at a

02:24

video game maker or Facebook and glean anything relatively useful from their

02:29

accountings for inventory because well they really don't have any like their

02:33

inventory is you know kind of phantom that is Facebook's inventory in quotes

02:38

is the blank space it serves on its computers when new people come on in [man in empty warehouse]

02:42

view and or click on ads it sells in one package or another not the case and car

02:48

tires there's actual real inventory there that cost real money so key

02:51

concept number one is that the actual index number you get from inventory [writing on white board]

02:56

turnover is just a relative thing and it's defined mathematically as cost of

03:01

goods sold divided by yes inventory and you generally take an average inventory

03:07

number there to come up with that number so let's cogitate on this whole thing a

03:11

moment we're gonna use cogs or cost of goods sold is in the numerator here it's

03:15

not a bad number it's car tires plus windshield wipers plus cup holder

03:19

thingies plus engine blocks plus rich Corinthian leather seating by the mile

03:24

plus so a bunch of other stuff as well as assembly labor shipping and a bunch

03:29

of other costs that aren't inventory it all adds up to the cost of goods sold

03:33

kind of in the gross margin lines there yeah and then we're dividing it all by

03:37

inventory but wait what's the difference well aren't things that make up cogs

03:42

just inventory no well at some point along the production line dance they [group of people dancing]

03:46

will have been inventory but not necessarily at the moment snapshot was [full warehouse]

03:50

taken or that time period was mentioned curveball to the head right cogs is an

03:56

income statement item it measures the expenses we had in selling the goods we

04:01

sold over a given period of time like last quarter or last year but inventory

04:05

is a balance sheet item it's a snapshot at any given point in time albeit

04:10

admittedly usually taken every quarter or month or year so this ratio links the [inventory in warehouse]

04:15

balance sheet and the income statement in kind of a nifty way if you think

04:19

about it by relating the volume of stuff sold in a given period with the stuff

04:23

that you know our iPhones shotted the day we decided to take

04:28

inventory of you know inventory so yeah that's what keeps the cogs of the

04:32

machine you know running smoothly we hope

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