"Cash is a King".

The following lecture, talks about a man that has its own business running in a way most
people would like to do, this for is set as an example of what an industry is like, it starts
with the tale of a man that administrates his resources in a manner that most people would
envy, mainly because he doesn’t owe the money his earning, he literally only has to pay
un his employees by their time worked, rent, supplies and a few more administrative
accounts, all of this without the pressure to make more money every day because he had
no stockholders that would demand more of the profit due to all those details, there is no
need to pressure for the owner, but also there is the part where you only rely on the cash
incomes, there are no pending or credits that need to be paid and in a certain kind of
manner if you were to only rely on what you sell day by day, it implicates that you may not
sell nothing at all some days. It refers to not only living up to what you have, but also the
savings part, you need to have a reserve in case of any unexpected event or maintenance
that need to be taken in to action at a time needed.

So, where is your cash? That is the main question one must ask, because we need to
know where it is, for the main subject you can find it in the balance sheets, this sheets are
of great importance due to the fact the it doesn’t only hold the information about the
income statements, but also spends a lot of time evaluating profitability, gross margins,
operating costs and net income, which is where your money is reflected, it also is where
the history of your every single one of your earnings are along with the expenses and
debts for a period of one fiscal year, the balance sheet is seen as a photograph that tells
you how much you have at a determined period of time, that includes some assets as
equipment, inventory and never the less obligations of your clients or to whom you owe but
most importantly the cash you have, the debts that you have to pay or are going to paid.

Forward on we have defined working capital, it is said that the working capital is the cash
that the company needs to have in standby, in a manner of speaking because it has to be
present in a short time of period If you don’t have cash you won’t be able to keep your
company running and may bankrupt and by all means be shut down permanently, it is said
that some companies learned the hard way during the 2007 financial crisis. In the balance
sheets the working capital is divided into two categories, current assets and current
liabilities. In the first one we can find the money that we will soon have, short-term
accounts receivable, inventories that can be sold. Liabilities are the short-term
commitments to pay less than one year, including accounts payable, bank loans, lines of
credit, etc., when subtracting the current liabilities from the current assets it equals the
working capital. In essence working capital consists of stuff stacked like paper that
represent obligations to pay or be paid, sometimes they are more tangible things like
inventory plus money in the bank.

In the measurement of working capital in days, it is said that this documents or papers that
are stacked that they represent inventories, accounts payable or represent cash from
yourself, or your customers or suppliers, by handling all of this documents you can acquire
cash. The better the company is managed, the less investors there will be needed, what is
intended is for suppliers to keep an inventory for as long as possible so that they have the
money or assets in raw materials and the paperwork they have, on the other hand, it is
encouraged that customers to pay up as soon as possible to avoid conglomeration of
unnecessary paperwork laying around, there for by reducing working capital you acquire
two powerful benefits, the first one is that for each dollar that is released from inventories
or accounts receivable rises to $ 1 one-time contribution to cash flow. The second one is
that the search for zero working capital permanently increases the profits. When the
inventories are reduced significantly, the warehouses disappear, the companies don't need
stockroom workers or equipment in that manner which will reduce some of the inventory
costs that means that the labor applied in this area will be reduced and earn some
savings.

The main goal is to make cash your king, how you must be asking, well in this case, we
must be wanting cash flow rather than future earnings, it is said that a company can
subsist if it has cash, but it cannot subsist on future earnings, since it does not have a way
to maintain itself and it can close very quickly, it has two examples of companies, the first
one is the wall street journal and the second one is the Costco warehouse, in their own
way each one of them manage to use the plan that worked for them.

They take as an example Dow Jones as it was its beginnings until it was the Wall Street
journal which was bought for 2 cents a copy, its advertising was sold at 20 cents a line,
this newspaper diversified by buying local newspapers, with so much money it had, I could
invest it in something new or different, instead of keeping the money still. In 1992 Dow
Jones started his digital page where he presented information from the Wall Street journal,
New York Times, Financial Times, Washington Post and Los Angeles Times.

He also developed a division where small companies paid a subscription and had access
to certain information, all large or small subscribers worldwide always have to pay in
advance. Dow Jones sold some of its print newspapers because online news is more
profitable, less raw material is used, so there must be more profit and less staff.

The Dow Jones managers were veterans who adapted very well to the change and knew
how to make the correct changes, for example three-day inventories, accounts payable 88
days, etc. He is improving working capital to -77 from -72 and he still continues to charge
for his old businesses such as newspapers, restaurants, Barons, Wall Street cables, the
transition to digital went very well as he spent his income from 107 million in 1992 to 386
million earnings to its partners

We have the Dow Jones company which is a newspaper that is paid in advanced, there for
it seems like a good business, because you have money first and then deliver the goods,
this model worked for a while and had its benefits, one of them was the price that it was
sold, not only was it adequate, but it also accessible, therefor almost anybody could paid it,
but after a few years the media started to change and so did the way to communicate,
technology advanced in ways that they were not fully prepared and had to adapt, now on
they have overcome this issue with a plan B, where they went digital but still get their
subscribers a hard copy for their paid subscription, all of this represented an investment,
not only showing that even if you are paid in advanced, you might not be able to thrive in
the business world.
On the other hand Costco relies on membership fees, quick inventory turns, and strict
management of accounts receivables and payables. While is mentioned that this kind of
warehouses have lower prices, but also have to be a member to purchase in this stores,
so before people even noticed, they were paying to purchase in the store merchandise
that had lower cost, making the store gain money before even selling anything in the store.
Costco warehouse not only lowered their prices to accommodate to the customer already
had paid a membership but went even further, he got better pricing from their suppliers,
better merchandise, better payment fees and payment plans, all of this improved their way
of selling not only to resales but to the middle people in between, getting them to buy in an
average of every seventeen days because of the good offers, not only of foreigner brands
but also their own brands, that made people feel like an upper class, which made them
compete strongly with other stores that sell by the volume.

Take the history of the store, in 1981 the owner of Price club fired James Sinegal who
worked from his adolescence and knew the entire business of the store very well, two
years later in 1983 he opened a business in Seattle, with the same formula of Price club,
the first Costco He sold memberships to be able to buy in his store, the second Costco
store, only accepted cash or debit cards, no credit cards, for instant cash. The Costco’s
stores were given the task of lowering the price of their suppliers to the minimum possible
in order to make more profit, an example was salmon with a cost of $ 5.99 a pound, but
when negotiating Costco asked him to remove the skin and the bone and packed it, apart
from lowering the price to $ 4.39 a pound, all this was possible due to the purchases that
this store makes. All products sold at Costco cannot be sold or labeled at more than 14%
of their price, the other stores such as Kmart or Walmart are between 20 and 50%. Costco
to turn inventory quickly only handles 40,000 parts unlike other stores that are over 75,000
parts.

It has been asked the question of do working capital models matter? In some cases it
does, we intent to learn from other experiences like Costco's story speaks for itself, the
lesson Costco teaches us is how fast a company can grow, thanks to its methods of
membership with the cash in advanced and its quickly spinning inventory and making it
possible to expand even further in the territory so it can reach far more places, not only a
certain region, in this case, Costco not only sells in the United States, but also sell in other
counties like Mexico, where some percentage of the people buy at this large stores, not
only for the price, but also for the value, since when you buy by volume you end up paying
less.

Compared to Sam’s Club, Costco had eighty-two fewer outlets, but generated about $ 20
billion more in sales - about $ 59 billion. Her pre-tax profit of $ 1.7 billion, of which nearly $
1.2 billion was membership dues, was 3 percent of sales with customers who pay for the
privilege of buying, thereby providing the cash needed to manage and to grow, so there
wasn’t a big need to gain big profit margins? It is exactly as Sinegal wanted it. "I hate to
sound so simple," he said, "but all we are trying to do is sell the best quality merchandise
for a better value than anyone else” this giving him an advantage on the market.
The lessons learned about working capital models, would be to note that thinking in a
strategically way about your working capital accounts can be more important than what
accountants call earnings, just a few people would think in this manner.

Why is it worth fighting for the negative benefits of working capital? Well worth searching
and working. Why? First, it makes it easier and less expensive to get into business. And it
makes it much easier for your business to grow such as hairdressers, preparers of some
service such as accountants or another service, painters, plumbers, electricians, etc., are
usually paid in cash and do not have inventory, many of which are they realized, they
started investing the money in more businesses to gain ground for entrepreneurs without
vision.

We can see there is more in a balance sheet that has to be funded than working capital,
there has to be an investment, this one can be from the people that are running the
company as well of other people as we could have seen in the reading, for example the
Costco method to lure people to buy memberships, by creating a false state of superiority
that had people around coming just so they could feel superior to others.

It is mentioned that your working capital model will be constructed from a building blocks
that are unique in your industry, this meaning that not all companies are the same and
what works for one company will not necessarily work for others as well, this been said we
must face the hard cold facts, that will begin to tell the true value that you really need to
know which are driven by mainly tree strategic questions before building a capital model,
in the first one me must consider the revenue model in which we will know how many days
ahead or behind we are on delivering our goods according to our promise dates, in which
you will find yourself asking if you can get your customers to pay in advance, or even just
get paid accordingly.

The second question must be how fast or slower can you pay your employees and
suppliers, this will give you time to gain more cash and be able to fulfill some other needs
that you may have, and most importantly is how much cash you must tight up in you
inventory, been able to know what the market holds and knowing what to expect, you must
be prepared for whatever outcome may appear, this last one will have a great impact on
you financial situation and will be a main factor that will determine if you will remain in the
market or will you be needing any kind of change in you ways of managing your finances.
Conclusion

As a conclusion I must say that this types of companies are based on the capitalist model
that exist in the world, not only are they selling you a product, but also selling you the
illusion of a status, but in their own way work, due to the kind of people they sell to, the
search the best merchandises, they show why they are the kings of the market, by
searching ways to provide the customers with the product that they need at a price that
they find reasonably.

Not leaving behind the importance of the balance books in which they can rely to gain the
most benefits with the minimum amount of risks the key points of these companies were
the various points and vision of the directors, one huge lack of human capital, another
various flows of not only raw material but the persistence that some of them have to
bargain and get more for less, and how both of the examples explained in this literature,
are giants in the industry, well planned where they get paid in advanced and don’t have to
wait to cash the earnings, but also have to be extremely careful with the management of
the cash.

Business are really greedy…