Dan Martell - March 13, 2023


What Rich People Don’t Want You to Know About Money


Episode Stats

Length

15 minutes

Words per Minute

192.08882

Word Count

2,993

Sentence Count

56


Summary

Summaries generated with gmurro/bart-large-finetuned-filtered-spotify-podcast-summ .

Transcript

Transcript generated with Whisper (turbo).
00:00:00.000 When I was starting off my first company, my dad used to say this to me all the time,
00:00:04.820 cashflow, cashflow, cashflow. And I was like, yeah, dad, ah, snooze fest. Like I don't really
00:00:10.520 want to focus on that. I'm all about building a business and solving big problems for my
00:00:15.220 customers. And then one day I realized I couldn't make payroll. My dad was right. Cashflow is king
00:00:22.400 because it doesn't matter how much revenue you make. If you actually don't convert that revenue
00:00:27.320 into dollars and cents that show up in your bank account,
00:00:30.220 you cannot pay employees with receivables.
00:00:33.740 And what I have had to do over the years
00:00:36.060 is I've had to mature my financial acumen.
00:00:40.280 I needed to understand how money moved through my business,
00:00:44.860 how to monitor it so that I could then take
00:00:47.900 what I was seeing in a spreadsheet
00:00:50.480 and correlate it to decisions and activities
00:00:53.360 I've made in my company so I created a feedback loop.
00:00:56.420 So what I want to share with you today is four specific financial strategies that I
00:01:03.620 know on the surface can sound like a boring snooze fest, but I'm telling you, if you're
00:01:09.040 willing to go there with me, you will walk away with hopefully the answer that could
00:01:14.380 be the thing that's been stopping you from growing to the next level because you just
00:01:18.820 are not a numbers person.
00:01:20.540 Or I rather talk to customers than understanding how all these bank accounts get reconciled, blah, blah, blah.
00:01:27.400 I don't want to deal with that.
00:01:28.660 I'm not saying you got to learn that.
00:01:29.860 But I'm saying there is opportunity for you to mature your financial knowledge.
00:01:33.980 And this is how we do it.
00:01:35.180 Let's get into it.
00:01:38.400 Number one is effective management, okay?
00:01:41.580 I'm going to share with you at a high level how literally every business in the world operates, okay?
00:01:48.320 Number one is you have assets.
00:01:51.160 This is your business, this is your people,
00:01:52.780 this is your inventory, this is your products,
00:01:55.840 this is your IP, this is your land,
00:01:57.940 whatever business you're in, you have assets, okay?
00:02:00.640 And then those assets generate revenue, okay?
00:02:04.260 So hopefully you know how to take an asset
00:02:06.220 and you convert it into revenue, to sales.
00:02:09.040 The third thing is,
00:02:10.480 and this is why it's an effective management,
00:02:12.420 if you're good at managing your business,
00:02:14.460 these are the things you're doing.
00:02:15.600 Third thing is you create profit, okay?
00:02:17.720 Now, the interesting thing about profit,
00:02:19.080 especially from an accounting point of view,
00:02:20.800 is profit doesn't mean anything.
00:02:22.940 You can have profit on paper
00:02:25.100 and it does not show up in your bank.
00:02:26.820 If you've ever experienced this,
00:02:29.120 then you know what I'm talking about, okay?
00:02:30.760 Number four, so that's third is profit.
00:02:32.300 Number four, though, is what's called operating cashflow.
00:02:35.260 This is where, hopefully,
00:02:37.020 depending on where your cashflow comes from,
00:02:39.380 because there's been experiences like Enron and FTX
00:02:44.380 and others where, again, the accountants can make it look like a business is producing profits,
00:02:49.760 but it does not convert it into actual good dollars, okay? Operating cash flow doesn't mean
00:02:55.500 actually like real cash into your bank account because you could have a line of credit,
00:03:00.080 you could have investors, et cetera. The fifth one, so if you're doing this,
00:03:03.880 you're going from assets to revenue to profit to operating cash flow, the last one is free cash
00:03:08.920 flow fcf and just for what it's worth this is the number one metric that jeff bezos from amazon
00:03:15.560 focuses on so a lot of people have like early days of amazon being a public company looked at their
00:03:20.840 stock and go yeah they might be growing but they've never made a profit and jeff's like yeah but our
00:03:26.520 free cash flow is rock solid and that is you know even how warren buffett looks at companies their
00:03:32.440 fcf their free cash flow okay so i wanted to share this with you because the first thing you need to
00:03:37.880 understand about any business is how does it produce fcf free cash flow and it starts from
00:03:45.720 one end with the assets converting those assets hopefully strategically pricing packaging products
00:03:51.880 into revenue then that revenue hopefully you sold it at a high gross margin enough to make profit
00:03:57.880 then you're operating the business and the financial structure and the loans and the capital
00:04:02.040 so that you have a positive operating cash flow and if you're doing that and you're doing it right
00:04:06.600 then you should have free cash flow and that is the the game that you're playing in business
00:04:11.720 you're trying to optimize it and if you forget to do this like i did you can have growth and then
00:04:17.720 not be able to make payroll you could have your business look healthy from an accounting point of
00:04:24.360 view and then be dipping into your line of credit i had a client once that literally had two years
00:04:30.440 of making so much money they didn't know what to do with their cash and because of the way they
00:04:34.360 were managing the reporting didn't see that they started to eat into the cash and within 16 months
00:04:41.640 all the money they had built up was now gone and then they were losing 40 50 60 000 a month well
00:04:49.560 you can't do that for many months in a row until you have a problem in your business but understanding
00:04:55.560 that every month that goes by you need to be an effective manager and not allowing yourself to
00:05:00.920 to take wins and then essentially pollute the numbers
00:05:04.480 to see how you're being an effective manager this month,
00:05:07.280 you gotta look it on a 30-day window.
00:05:10.200 Number two is business report cards.
00:05:12.240 I know, you're like, hey, I'm not in school anymore.
00:05:15.140 I don't wanna do the report card thing.
00:05:16.900 But here's the thing.
00:05:18.440 I've always been frustrated
00:05:20.020 with how ridiculous financial reports are, okay?
00:05:22.900 And if you've ever heard these terms
00:05:24.600 like income statements or balance sheets
00:05:26.680 or cash flow analysis, these are the tools
00:05:31.180 that at a minimum you should understand
00:05:33.060 what they actually do, okay?
00:05:35.120 We'll talk about how to make sure that they're accurate,
00:05:37.360 but I remember when I was getting into business,
00:05:40.560 I didn't know anything about the financials,
00:05:42.780 and I was frustrated because I would read these books
00:05:46.060 of these super successful CEOs,
00:05:48.200 and I was like, how do I become that person?
00:05:50.560 How do I learn how to talk about my business
00:05:53.800 the the language that these ceos these publicly traded ipo companies on squawk box and all these
00:05:59.800 different news sites the way they talk about it right earnings per share is eps what does that
00:06:04.440 even mean good news is you don't even need to know this unless you do decide to go public
00:06:08.600 then i'd highly recommend you hire a ceo to do that but what you want to do is understand that
00:06:13.800 it's kind of like a high-end sports car your income statement is essentially the performance
00:06:20.280 of your race car okay the balance sheet is the car's worth and then the cash flow is essentially
00:06:30.760 the gas in the engine and its ability to move gas and propel the car forward and if you understand
00:06:37.800 this then you realize like the income statement is kind of like a you know report over time
00:06:45.880 the balance sheet is kind of like a current state of value of like the business it's got all the
00:06:53.080 different assets and and liabilities and then you got your cash flow statements which is your ability
00:06:58.680 to produce cash from your business and forecast hopefully into the business so you understand it
00:07:05.800 so if you've never sat down and asked your accountant this is what i did my buddy dave i
00:07:10.520 I said, Hey Dave, I don't know how to do this.
00:07:12.840 I heard you're really good at business.
00:07:14.780 Teach me how to read these documents.
00:07:17.780 And he showed me how to connect this number
00:07:20.860 is this number on the balance sheet.
00:07:23.600 And this number is this number on the cashflow statement.
00:07:26.900 And all of a sudden the whole thing got unlocked, okay?
00:07:30.340 So I'm not here to do a masterclass in accounting.
00:07:33.340 I'm just telling you that if you can get your accountant
00:07:35.380 to teach you this, you can get your friend Bob
00:07:37.460 to teach you this, you can teach anybody.
00:07:39.260 Go on YouTube, go buy a course on Udemy.
00:07:42.300 Learn how to read these three documents.
00:07:44.880 It is enlightening because once you understand
00:07:48.680 how they're all correlated, then you can speak account,
00:07:51.720 which is like accountants do not know
00:07:53.620 how to talk entrepreneur.
00:07:54.880 You know how to talk entrepreneur.
00:07:56.360 It's probably sales pipeline and customer onboarding
00:08:00.080 and like all these weird spreadsheets,
00:08:01.540 but then you can coordinate both of them
00:08:03.540 to really give yourself an advantage.
00:08:05.420 Number three is financial management.
00:08:07.720 Now, if you've ever been in business
00:08:09.160 and you thought you were doing good
00:08:10.920 and you're looking at the numbers
00:08:12.120 and your pipeline's there
00:08:13.200 and your sales are coming through
00:08:14.340 and your inventory's there
00:08:15.260 and all of a sudden you run into a major issue.
00:08:17.940 It's like you had all this cash tied up in inventory
00:08:22.480 or work in progress
00:08:23.740 or you had three payrolls come out in one month.
00:08:26.560 Those are always fun months.
00:08:28.440 I've been there and here's what I've learned
00:08:31.160 is that all of these problems can actually be avoided
00:08:34.360 if you understand three parts to good financial planning.
00:08:38.820 high level financial plan these are three things and the cool part is these are the same three
00:08:42.980 things that you need for your household a lot of you guys don't want to have a budget for your
00:08:46.740 household because you're like hey i make a lot of money and i don't want to think about money
00:08:51.140 i like to to feel like i have abundance and i like to you know visualize and focus on possibilities
00:08:58.740 and just live in gratitude and abundance and i don't want to look at the numbers here's the deal
00:09:03.460 you have to because they don't lie and they tell a story and the more you focus on them the better
00:09:07.540 they get which is super awesome so three things you got to do number one is you have to figure
00:09:11.740 out budgets budgets are there to create a feedback loop for teams to know how well they're able to
00:09:18.380 predict the future if people can't budget then it means they don't understand their business well
00:09:24.480 enough to predict a future state and what that investment and structure is going to need to look
00:09:30.180 like so that you know what your budget is every month and every quarter and every year to achieve
00:09:35.380 that so to me a budget process is almost like starting off and saying how good of a guesser am
00:09:41.260 i and then as the year goes by you actually get a feedback loop i'm a good guesser and if i'm a
00:09:46.280 good guesser i'm a good manager and if i'm a good manager i'm a good leader and leaders produce
00:09:50.380 results and outcome and that's what i want for you okay second one is to create a forecast now
00:09:57.600 the problem with the forecast is that most people have never done this before so they look at a
00:10:04.000 forecasting like hey i got a forecast forward what do i think i'm going to do with these stuff
00:10:08.800 but i've never done this before so how can i be accurate here's the way i look at it is i then
00:10:14.200 talk to people that have been 18 months into the future where i've been these could be consultants
00:10:18.740 these could be advisors could be your accountant it could be your lawyer it could be whoever you
00:10:22.140 know that might have a glimpse into the future of your industry look at the historical as well
00:10:28.380 to use it to create a forecast now you have a forecast so you have a budget for what you should
00:10:33.140 be spending and you have a forecast the third thing is the reporting now when I was building
00:10:38.120 companies in the early days I honestly didn't look at my reporting often most of the time I was using
00:10:44.220 my bank account as a feedback loop to was I doing okay zero budgeting zero forecasting zero reporting
00:10:52.640 however it gets you to a certain point until you hit these natural roadblocks where you have
00:10:58.800 cash flow issues where you have discrepancies in your tax exposure where your accountant calls you
00:11:05.440 and you have a tax bill that is three times larger than the one that you've been putting
00:11:10.560 the money aside i mean literally you know there's been times in my career where i
00:11:16.320 strategically through the reporting of the people put the money aside to find out that somebody
00:11:21.760 miscalculated the taxes and now you have a bigger bill now i've always operated using a very prudent
00:11:27.920 model because i wanted to make sure i have operating expenses covered etc in case of a rainy
00:11:31.760 day so it wasn't an issue but i share all this because if you don't have the discipline to sit
00:11:37.280 down i work with my clients on this all the time have a budgeting process a forecasting system
00:11:42.080 and a reporting structure so that that reporting gets disseminated to everybody on your team
00:11:47.760 they can manage how they're doing against budgets and then you can also look at forecasts to see if
00:11:52.720 anything's changed in the business so that you can readjust and set some new targets that is how you
00:11:59.040 do good financial management number four is reporting secrets okay i want to give you some
00:12:05.760 very specific absolutely non-negotiable things you should be getting reports on the first one is a
00:12:11.920 daily cash report every day across my companies and my personal net worth i get a financial cash
00:12:20.320 report in my inbox so i know the cash movement of my companies and my personal net worth on a daily
00:12:30.000 basis why if there's anything that's out of the norm where i know what my normal cash movement
00:12:36.000 in and it jumps up two or three x boom i see it some of you don't have a pulse on your financials
00:12:43.520 and you're just things are moving in and out of your business and you might have somebody that
00:12:47.920 invoices you for this large amount for something that you never even bought and your finance team
00:12:53.280 picks it up your assistant picks it up and sends it over and it gets paid and all of a sudden
00:12:56.720 you're like whoa hey what happened to that money and then they're like oh we paid off this vendor
00:13:00.160 and you're like what is that vendor what do they do i i see that happen all the time so that's
00:13:05.200 number one is you want a daily email cash report on all your businesses and ideally your personal
00:13:11.760 and if you have an executive assistant give them the task to pull the report to put it in a
00:13:15.840 spreadsheet copy and paste spreadsheet put it into an email hit send i file it away and i look at them
00:13:21.440 every morning as just a way to do a sanity check number two is on a weekly basis you want to be
00:13:27.920 looking at the cash flow forecast right you want to get your team to like update any cash flow
00:13:33.440 forecast you want to look at sales you want to look at productivity and assets so essentially
00:13:38.720 your your assets ability to convert itself into revenue and you're operating cash flow like
00:13:45.120 on a weekly basis even though you can't close the books you should still get the team to do
00:13:51.040 as much reconciliation across your accounting so that you understand how the businesses move
00:13:58.560 week over week in regards to expenses and revenue that's a weekly report for sure
00:14:04.720 and then finally on a monthly basis you want to understand the three big ones you want to get a
00:14:10.320 p l i always try to get it 10 days after the month close so mandatory 100 on the 10th you want to get
00:14:17.840 the profit and loss you want to get the balance sheet so you know kind of how the asset or the
00:14:22.240 value of the business is moving forward and then also where the cash goes your cash flow statement
00:14:26.160 that is non-negotiable if you feel like you don't have the financial maturity you need to go to the
00:14:31.920 next level these are the three specific sequences and timelines for reports the daily cash the
00:14:37.760 the weekly reporting for the ability of the asset
00:14:40.740 to be productive, and then finally,
00:14:42.440 how well you did kind of getting
00:14:43.820 the three business report cards, scorecards,
00:14:46.140 so you know what's going on.
00:14:47.320 If you made it to the end of this video, congratulations.
00:14:50.440 I know I tried to bring some life
00:14:52.220 into the financial reporting,
00:14:53.840 but it is one of those areas that is not sexy,
00:14:57.140 it's not fun, it's not chocolate,
00:14:59.080 but man, is it broccoli, and is it important?
00:15:01.940 And if you nail this,
00:15:02.840 you will not only elevate your financial maturity,
00:15:05.260 but you will elevate your ability to lead.
00:15:07.860 And that's why it's important to understand
00:15:09.500 the financial structure and flow of cash
00:15:12.000 through your business.
00:15:13.100 If you want my specific report card
00:15:15.640 for how I look at what I call the precision scorecard
00:15:19.220 of all my companies, you want that template and structure,
00:15:21.720 click the link below to download your copy.
00:15:23.740 It's my gift to you.
00:15:24.860 You just got to click the link,
00:15:26.020 download the template and the structure
00:15:28.000 and how to set it up.
00:15:29.140 I want you to have that visibility
00:15:30.640 and optics into your business.
00:15:32.140 I hope this video finds you awesome
00:15:33.940 and I'll see you next week.