[MUSIC] Now, here we come with the days of inventory. Now, as you're going to see, it's very similar to days of receivables. The structure is exactly the same, as you would see. It matters a lot specifically in this company because as we said before, this company is about distribution and that company has a lot in inventory. So to understand why we have a lot of inventory over the last few years and to see what is coming from an increasing sales or an increasing days of inventory, we need to go into the operational ratio. So days of inventory, again, if we zoom the balance sheet here, and you see that inventory here is 452, we know that what is in inventory is the stuff that we have in our warehouse that hasn't been sold yet, right? Now, what are the days of inventory? Well, the number of days I take to sell my inventory. So how many days do I take to sell a specific panel to my client on average since I buy it from the supplier? Or in other words, what I have in the inventory will be sold in the next X days. So you can see, that the structure is very similar and that we can pull very similar examples, right? The first one will be if I sell 100 euros a year, my sales are 100 euros a year, but my COGS, my costs of goods sold are 80 euros a year, and I have 40 in inventory. What do you think are my days of inventory? Now it's a little tricky because I'm giving you that I'm selling a 100 a year but my cost are 80 a year. Which of the two numbers should you take? What is your intuition? Well, if you agree with me, the way in which you subtract this from the inventory and then account for them, it said the costs of good sold, right? So we should take the 80 instead of the 100. So if I have 80 COGS a year and I have in my inventory 40, that means that my days of inventory's half a year, 180 days, right? In other words, like before, right, if I sell 100 euros a month and I have 16 COGS and I have two months of inventory, how much do you think I have in the inventory? How much do you think? I have 100 euros a month, 60 in cogs. And then two months of inventory. If in one month I have 60 cogs, in two months I would be having 120 euros in the inventory. I mean, it's pretty simple again, right? But I am very interested in you getting the intuition of this. Because as you agree with me as soon as you are done with a Coursera, you will forget the formulas and you know it. The important thing is that you keep the intuition, so that you can work out and see a balance sheet and a P&L and try to understand what are the mechanics and the dynamics behind that, right? So is there a way to put this into a formula? Yes, of course, but mentally what we've done is first, in the inventory, there's a stat that we haven't sold. Second what we're comparing is what we have in the inventory with our COGS in the P&L. Those are the two things that are in place. So you have my daily COGS is X and I have in the inventory X, my days of inventory would be 1, right? So the formula is Inventory over Daily COGS. [MUSIC]
