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

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 0.94

00:05:20.020 with how ridiculous financial reports are, okay? 0.85

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.

Dan Martell - March 13, 2023

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

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