Boosting Your Financial IQ
Boosting Your Financial IQ
137: I Spent 8 Years Studying Finance In School. Here's What I Learned
Not understanding cash flow can put your business at serious risk. In this episode of Boosting Your Financial IQ, Steve Coughran emphasizes the critical importance of mastering free cash flow for business success. Drawing from his own experiences and real-world examples, Steve highlights how businesses often focus too much on profit while overlooking cash flow, which can lead to devastating consequences. Whether you're a student learning the ropes or a seasoned business owner, this episode will equip you with the knowledge to effectively manage your cash flow and prevent potential financial pitfalls.
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So many businesses fail because they don't watch their cashflow. If you don't watch your free cashflow, there's a really good chance you could go out of business. This is BYFIQ. Wealth and success come from understanding how finance works in business and together we'll explore the most important topics to 10X your financial results. My hope is that we can work together soon. Please share and enjoy no-transcript. But when they don't understand the true mechanics of free cashflow, they could get themselves in a lot of trouble, and I'm gonna share with you a really interesting story. Kind of feel bad about it, but I've repented since then, I've changed my ways and I think I'm good now. But I'm gonna share this story with you nonetheless here in just a minute. But that is what I want you to understand.
Speaker 1:If you are going to school right now, if you're studying accounting and finance, make sure you're asking questions about cashflow, because I didn't even know what to ask, especially when I was in my undergraduate studies. I was just going along and learning about debits and credits and about accounting fundamentals, but I didn't stop to ask about free cashflow. And it wasn't until later on, especially when I got into my MBA program and I was turning around companies and I was like, okay, this is the ticket to success, right? So I'm gonna help you to fast track all of that Now in my financial pro program. I have two programs on my website byfiqcom, the fundamentals of finance. I give you a taste of what free cash flow is all about. But when it comes to really understanding what is free cash flow, how do you model that out right? How do you benchmark a company when it comes to free cash flow? How do you build a forecast? How do you do evaluation as it pertains to free cashflow? I get into that in so much detail because it's the crux of business.
Speaker 1:I can't tell you how many business owners come to me on a regular basis and they're like, steve, can you help me with my business? And I'm like, yeah, what's going on? They're like, oh my gosh, we can't stand our CPA. They're terrible. They don't help us make good financial decisions, they're so slow to respond, they're so focused on taxes and compliance and we're running out of cash. We need help. And I'm like, okay, all right, slow down. I just met you, all right? Or is this our first date? And I'm just kidding? But we start talking and I realized very quickly that their business is so focused on profit or even revenue that they fail to understand free cash flow.
Speaker 1:All right, free cash flow, you can find this very easily on the statement of cash flows. I was going to say the statement of free cash flows, but you can find this on the statement of cash flows by going to cash from operating activities. That's the first section, and you start with net income and you account for other non-cash items. You also account for changes in working capital and you arrive at cash from operating activities and then you just subtract out CapEx, capital expenditures, in other words, the investments in property, plant and equipment, that's, in investing activities. If you just take cash from operating activities, less capital expenditures, you arrive at free cash flow.
Speaker 1:Now, if you're wondering what is free cash flow, it's the amount of cash that's left over after everything that's available to return to equity providers, to pay down debt or to reinvest in a business. And guess what? The intrinsic value of a business, the value of a business, is based on the cashflow that's generated over its useful life. All right, that's the definition. Is the discounted value or the value of dollars today, today's dollars, right that the business is expected to generate over its remaining useful life. Okay. So that's why I love cashless much and it's like paramount in the world of business, in the real world. So if you're studying, like I said, great, if you're running a business, make sure you understand how to get to free cashflow, make sure your financial statements, your forecast and your KPIs all speak to free cash flow. You'll be in a really good position.
Speaker 1:Okay, here's this quick story that I wanted to share with you that I was talking about at the beginning, that I felt bad about I I still kind of feel bad, but I think I moved on and I made amends with this professor here. I was in Germany in the study abroad program, all right, and one of the classes that I sat there for two weeks two weeks, my life was managerial accounting and it was just part of the program. There's no way to get out of it. So I had to sit through it. I was like, okay, that's fine, so you can always learn something. I'm not that arrogant to believe that I know everything. Trust me, I learned things all the time. I still make a ton of mistakes. So I went there with an open mind and I did learn some things.
Speaker 1:But here's the problem that I had with this class. This is a course that was being taught to executives all right, business professionals and it is driving me crazy. But the whole time during the two weeks, or almost for the two weeks I'll get to that here in a minute the professor was driving home profits, profits, profits, profits. So he would talk about costing and doing this and blah, blah, blah, blah, blah, and then it would all distill down to profits and he kept saying it's all about profit and he was giving us different measures about profit, right, and so I was patient at first. Right, I'm not a super patient person, but I was patient because, like, okay, at some point he's going to get to free cashflow, but he didn't, and time went on, and time went on, and time went on and I was like, okay, all right, I need to say something. So it was like the last second to last class I think it was again remember which one.
Speaker 1:But finally I was like I raised my hand and I I just like lost it because I was paying a ton of money for this course, right, and I was spending all this time in the program and you know, I felt like out of responsibility to to speak up for my classmates and I was like, okay, we're talking all about profit, but what about free cashflow, especially in the world of manufacturing? Right, we're managerial accounting. That's where we're spending all this time talking about manufacturing. Case studies Like if you are not paying attention to free cashflow and how much money is tied up in inventory, for example, or in accounts receivable, or whatever it may be like you're going to grow yourself out of business. You could become as efficient as you want with your cost, but if you're not managing your working capital and your CapEx two things that are huge in the manufacturing world or in construction or whatever it may be that requires so much capital you could destroy your business.
Speaker 1:So I said this and you know I was respectful, but I was also young and kind of dumb and you know I kind of went off and I was going on this rant for a while and that's when I started feeling bad because I'm like dang this professor, it's nothing against him. He just like grew up in an era where that was like the big thing, like profit, right, teach people about profit. So I felt so bad afterwards and all my classmates were coming up to me and they're like Steve, yeah, way to go and I was like, yeah, not way to go, not way to go. You know I feel bad and like it's not a great thing overall, you know. So I went to the professor and I sat down with him during lunch and you know we're talking. I just said, look, I didn't mean to like, shame you or, you know, make you feel embarrassed or whatever it was that you're feeling, but here I am, I just feel like free cashflow.
Speaker 1:It's such an important topic to be had because in the real world, when I leave Germany and I go back, like guess what, I'm having these conversations with these business owners, boots on the ground, who are tapping into their line of credit, who are doing HELOCs on their home equity lines of credit to pull out cash to put into their business, to make the business survive, because they're not making good decisions about their free cashflow, and I'm like I feel like I have to speak up because it's atrocious. So many businesses fail because they don't watch their cash flow and, trust me, it's complicated. I have a team who helps me build these forecasts and sometimes it hurts my head to look at these models because there's so many nuances when it comes to figuring out working capital and projecting it, because the balance sheet could be really finicky and it could sway quite a bit, so it's really hard to forecast this. So you have to get in there and really know what you're doing. Same thing is true with CapEx. It doesn't show up on the financial statements except for the statement of cash flows, and most executives don't even look at the statement of cash flows. But this is like so important, like top priority for businesses to understand their free cash flows. That's why you see me get so passionate about this topic, because if you don't watch your free cash flow, there's a really good chance you could go out of business.
Speaker 1:Now you may be listening to this and you're like Steve, you know what I'm about to turn the channel because we are good, we have so much profit and we have cash. Well, guess what? I was working with a business years ago and the owner's like, hey, I want to like 10 X the business. I was like, okay, that's cool, slow down, though, like before you get all crazy on the growth machine, let's talk about what that looks like. So I built this model off for him and I calculated how much working capital he was going to require if he's going to 10 X the business.
Speaker 1:And I was like, if you 10X the business which I believe you can because they had a really good product you are going to grow yourself out of business unless you're able to secure this line of credit of several million dollars. And he's like, well, I can't get the line of credit. Like that. And think about it when you're growing your business really quickly, you're plowing a bunch of that profit back into the business to acquire new customers and just to figure things out. So you're not super profitable in high growth years typically, and so therefore, if you're not profitable, you're going to try to go to the bank to get a line of credit. And guess what? You're not going to be able to get a line of credit, but you're going to have all this growth. And then that's when you get into serious trouble.
Speaker 1:I've seen this over and over again and I told the owner. I was like, look like, here's the model. This is how much he could grow. You can't 10 X the business unless you figure out your capital constraint. And so we were able to figure out a sustainable growth plan and he was able to grow and become very, very successful. But it saved his business, because he came back to me later on. He's like Steve, if you didn't build me that one model, I would have literally put the gasoline on my business, grown my company and I would have been out of business.
Speaker 1:So I don't say that to pat myself on the back or anything. I say that to emphasize the importance of free cashflow because this isn't just about, like finance, like a theoretical case study. This is about people running businesses that are tapping into their savings, into their capital, they're taking on excessive debt and if they're not careful, it can have a huge and devastating impact on their lives. That's why I'm so passionate. So if you are an up and coming student, if you're just learning about this stuff, like, please, be sure to double down on your knowledge as it pertains to free cashflow.
Speaker 1:If you're running a business, make sure that you're looking at free cashflow on a monthly basis and make sure your forecast gets you down to free cashflow. It'll make all the difference in the world. That's all I have for you. You can learn more at byfiqcom. We have courses there. But if you ever want to just talk about this, you're like, hey, steve, just let's hop on a one-on-one strategy call. You can do that at cultivarcom. Be sure to share if you found this to be valuable. Thanks so much for being a part of this community and until next time, take care of yourself. Cheers.
