Multiple revenue streams will help you the economic swings that come in every business.  By Gary Shotton #000063

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Cash Flow

By Gary Shotton

This text is in Extreme Rough draft and will be edited in the near future.

Today, I am talking about cash flow. And this is an interesting topic. It may not sound like it at first, but it’s really a crucial problem, a topic to talk about. So on a personal basis, all of us deal with cash flow. I mean, we have a need for a new car and we actually have a pretty good job. We have money coming in, but we didn’t have the cash flow to go buy a car, maybe worse yet, that are the car dealer just convinces you that you do have the cash flow and you stretch it to the end. And you really don’t have any cushion and you buy on time Ay, ay, ay vehicle and you’ve got a payment that you wish they didn’t have for the next five years. That’s another subject. And let’s talk about cash flow in a business because it starts X escalating and starts getting more important when you have 65 workers and I’m here at my machine shop. We’re working here I have a $50,000 payroll every single Friday. You know what I’m expected to have cash to pay my workers. So what’s a cash flow issue? Now I watched it three and most businesses watch three particular financial statements. It’s a balance sheet, a profit and loss sheet, and some form of a cash flow analysis. Now on another video, we’ll talk about the other two but today we’re talking about a cash flow analysis. And what that means is that I have to be able to predict and analyze where my cash is. So I have all my bills paid and I can pay on a timely basis. Most people look really close at profitability and that’s important, but that’s about once a month. Let me give some examples of where people make mistakes in my opinion. I’ve had more than once when someone come to me and say, Hey, I found a business. I found out that Gary bought a business that was existing so they come to me and they asked me hey, would you look at this for me because I want to buy this business. And the first ones out of their mouth usually is, man it’s just making tons of money. How much? Well let’s make up a figure. Let’s say they’re making $500,000 profit on their profit sheet. And now it looks to this potential buyer without experience. This is really a goldmine. I can go on vacation, I can have a lot of fun. Now let’s take a look at this. Now here’s what really happens when you look at cash flow. First of all, if you’re coming to me and talking to me, you probably have already decided you’re going to borrow most of the money to buy this business. And I’m gonna oversimplify, but if it’s making $500,000 profit, you’re probably got a three or $4 million business and someplace in there, you borrowed a large chunk of money. And when you borrow a large chunk of money, you have to pay it back on time on a monthly basis and would not be out of line for you to pay back. Be responsible to pay back $20,000 payment principal plus interest that could be a $30,000 a month payment that you’re making money on money Yeah. Well $220,000 of profit on payment would add up to $240,000 of out of cash that’s got to come out of the business to pay what you borrowed for this business out of your $500,000 There went $240,000 Let’s talk about another one. If you’re making profit looking at profit, Oh, this looks so good. But you know what the IRS and the state tax commission they like to take taxes. So unless you’ve got some plan to work that in a fair and legitimate way they’re going to expect you to send them already percent for me 34% Federal 6% State 40% of your profit so you make 40 $500,000 What’s 40% of $500,000 400,000 I’m sorry, $200,000. Add the $200,000 to the other figure I gave you 240,000 You’re at $440,000 out gone out of your case, you only have $60,000 left, don’t blow it don’t go buy a new truck. Be careful guard your cash. Now I look at some third things that kind of analyze it’s kind of like a wave. If you had a tsunami coming you would be able to know and predict when that tsunami is coming so when I look at my accounts payable, I am very serious. To pay my bills on time. I had a time many times I pay them when I first hit the door because I like my vendors to like me, they give me better prices. They give me better service.  They call me up they take me out to lunch. They do things for me because I pay them on time and early. I also look at my accounts receivable that’s the people that owe me I compare those to my numbers. My Accounts Receivable could easily be a million dollars in this company. My Accounts Payables hopefully are like $250,000 or less 250,000 goes into 1,000,004 times so my quick ratio says I have more four more times money coming in next money month than I have to spend out that’s a great position to be in. But if I’m ever having as many or more accounts payable that I have receivables, I’m upside down, I don’t have the cash to pay. Boy it is so critical to watch your cash. I’m able to see something coming down the pipe. I can note a hold back three or four months in advance. I start holding back and becoming tighter on my spending when I see my cash is going to be slim. When I say that I we’re going to have some cash coming in advance or extra then I can buy a new piece of equipment. I typically buy a new machine or two probably too many new machines like this every year and that adds up to 500 to $700,000 Sometimes I borrow for that recently I’ve been able to pay it out of cash, but I watch my cash. I do not want to run out of cash and neither do you. It’s a horrible feeling. Many companies go bankrupt, go out of business with the best idea you’ve ever heard and they have a great plan ever. They they ran out of cash and nobody could would loan them money to get them to the spot that they’re going to be profitable in a big way. I hope this has helped. I’m proud to be with you. And thanks for joining me today.