Today's the 4th part of a series on understanding financial statements. Today, Jason focuses on cash management and working capital because cash is your lifeblood of a business.
Episode Highlights:
- 03:16: Profits are priority, not the leftovers. You have to have your expenses controlled such that you hit your target profit because all too often most businesses look at profits. They wonder why it doesn't grow, it doesn't grow because you are now focusing on growing the revenue and shrinking the expenses relative to that.
- 04:09: Jason suggests you should be pulling money into four other accounts that are earmarked for money that is not actually yours. What are those four counts? The first is profit. It is your money down the road. But what they are saying is whether it's once a month or twice a month. Whenever you get paid, you get to move over whatever percentage of profit you're trying to make into that.
- 05:43: Something is broken with your revenue model, something is broken with your operating with your expenses, but your product, you are going to hit the target profit. You have to make that work. This is a methodology that is also investing called reverse budgeting. You are taking all the savings and investing. In this case the profit off the table. We're also taking it off the fixed expenses.
- 07:31: Jason gives his insights on how much cash needs to be invested in the business in order to make sure you can operate? How do we answer that question? How do we move, modify working capital? Start off with the current assets, consider what's there, Cash is the goal. So short term investments in deposit accounts, financial savings accounts, money market funds, whatever else it is in order to basically help you meet those needs, that's ordered a little bit of interest. That's fine inventory.
- 11:08: Your current portion of your long-term debt and interest payable, is the money that is due in the next 12 months. You can work to minimize that by reducing. You can't work to minimize that by potentially refinancing. If you can stretch out the loans that you were taking out, you can basically reduce that which reduces your need for cash, and you need cash investment.
3 Key Points:
- Jason explains what basic accounting tells you. It tells you that your revenue minus your expenses equal your profit.
- Working capital or net working capital is the difference between your current assets and your current liabilities list, it's a measure of the company's quality and operational efficiency as well.
- Accounts receivable is the money that's owed to you. The shorter the payment terms on accounts receivable, the faster that money converted to cash, the longer the slower.
Tweetable Quotes:
- "You should have your payroll account. Have a separate bank account just for payroll. You make sure you move the amount for payroll over there every month." - Jason
- "You don't want a lot of good sitting around. You can make sales, but not so much that you are taking six months to sell it all if it's something small. If it's something big, you may not have a choice, but optimize inventory accounts receivable." – Jason
Resources Mentioned:
Facebook – Jason Pereira's Facebook
LinkedIn – Jason Pereira's LinkedIn
Full Transcript
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