Every industry has its own language and this is often referred to as jargon. Now I personally hate jargon, especially when I don’t know what it means. I often feel the person I’m speaking with is trying to make me feel dumb. And I know they’re not, but at the same time jargon is very useful, and it’s useful because it gives you a short hand way to explain something and that’s my belief on why it exists.

Today’s video is about the jargon that’s related to understanding your cash flow or what happens to your cash. I’m going to take a crack at explaining the jargon that’s most used when we talk with you about your cash flow needs.


Transcript

Every industry has its own language and this is often referred to as jargon. Now I personally hate jargon, especially when I don’t know what it means. I often feel the person I’m speaking with is trying to make me feel dumb. And I know they’re not, but at the same time jargon is very useful, and it’s useful because it gives you a short hand way to explain something and that’s my belief on why it exists.

But our goal here at the Sustainable Business is to avoid jargon at all costs and if we use jargon we need to define what it means so you know what it means. For me to talk about jargon I find this especially is true on our podcast, jargon comes up all the time with guests. I have to stop them and ask them to explain what it means because I want everybody to be on the same page and understand. And frankly, I think it’s the only respectful thing to do.

So today’s video is about the jargon that’s related to understanding your cash flow or what happens to your cash. I’m going to take a crack at explaining the jargon that’s most used when we talk about you about your cash flow needs.

Hi, I’m Josh Patrick the founder of Stage 2 Planning Partners and the Sustainable Business. I’m also the one who’s responsible for putting together our Cracking the Cash Flow Code Program and I’m the author of Sustainable: A Fable About Creating a Personally and Economically Sustainable Business.

So let’s start out with what a definition of cash flow is.

Now cashflow essentially is I start with x amount of cash and I have things that happen in my business, I have sales and I have expense and I have cash that goes out and then at the end of the day I have another pot of cash and the difference between what I started with and what I ended with is called cashflow. So in other words if I have $100 and I take in $200 and I have $50 worth of expense, I end the period with $150 in cash. That means I just had $50 in positive cash flow.

Now the next thing we look at, and this is something that you’ll probably already know about already but I just wanted to go over it for a second is a profit and loss statement.

Now a profit and loss statement is important but it’s not the most important thing in your business and we’re gonna talk about what statement is the most important thing in your business but a profit and loss statement is basically something that’s used by the government to figure out how much you owe in taxes. It doesn’t really tell you what’s happening with the success or failure of your business, although if you have a profit and loss statement and you have profits for years and years and years and years there’s a really good chance you’re gonna be creating excess cash.

Now on the other hand you might be having positive cashflow but you’re not making money and if that stays forever you’re gonna start losing money. You know Amazon for the first 10 or 12 years they were in business, they were playing what’s called the float. They had positive cashflow but they never made any money and today their cashflow is incredible but the amount of profit they’re showing are not nearly as good as what their cashflow is.

The second thing when you’re dealing with cashflow is that might be jargon, is a balance sheet.

Now a balance sheet’s really pretty simple. What it shows is what I own, what I owe, and what I’ve got left over over the years called retained earnings. So what I own would be cash, it would be accounts receivable, it would be inventory, it would be assets I’ve got in my business. So that tells me what I own, but what I owe would be accounts payable, it would be no payable to the bank, it would show what we have to pay out over a period of time. Some of that is what’s called current assets and current liabilities and some is assets and longterm liabilities and all those go into creating what I own, what I owe, and the difference between that is what I’ve saved over the years.

Now the third statement which I think is just really important, in fact I think it’s the most important statement is the cashflow statement.

And here’s what a cashflow statement does. A cashflow statement takes your profit and loss and it takes your balance sheet and combines the two that shows the differences in what comes in as cash and what goes as cash. Now you might be thinking so you know the money I paid for the bank to repay a loan shows up in my profit and loss statement.

Well it doesn’t show up in my profit and loss statement except for the interest portion. The principle part is a balance sheet item. The same thing with inventory. If my inventory goes up, I’m using cash but my inventory going up does not show on my profit and loss statement at all but is a use of cash so you need to have an understanding of a cashflow statement and what it does is it takes your profit and loss statement and your balance sheet, combines together, and tells you what happens to your cash over a period of time.

And then we get into what I call the four needs of cash.

And this sort of fits in with the cashflow statement. If my cashflow statement is not creating enough to fund these four areas, I need to be looking at my business and how I can improve my business and improve my cashflow so I can fund these four areas of business. And the four areas are:

  • Lifestyle, in other words how much money do I need to live my life every year? And not only how much money do I need to live my life but how much money do I need to live a life that I’m gonna be really happy with?
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  • The second thing for the four needs of cash is an emergency fund. Now an emergency fund basically is a pot of money that you’ve got stuck around, it’s off and aside someplace, you look at it and say why don’t I do something with it and then you remember that oh yeah, someday we’re gonna have a recession and someday I’m probably gonna need that money and if it’s not there there’s a good chance my business won’t survive.
    So an emergency fund allows your business to survive during the times where cash gets tight and banks won’t loan you money.
    .
  • A fully funded growth program’s the third thing you need. You know too often I see people say well, I don’t really need to do this to grow my business. If you want to grow your business and frankly your business is gonna do one of two things. It’s either going to grow or it’s gonna contract. .
    Rarely do businesses stay the same size for any period of time, so a fully funded growth program means I have enough money for a fully funded sales department, a fully funded marketing program, a fully funded advisor program for outside advisors when I need it, and a fully funded advertising program so people become aware of who I am. All these things go into a fully funded program to grow your company.
    .
  • And finally you wanna have a fully funded retirement plan. And this is a thing that I think is really important. Too often I hear people say, well you know my business is my retirement plan. Well unless you’re about one tenth of 1% of the businesses in the United States, it’s not. The truth is your business is worth much less than you think it is. Let’s say your business is worth a million dollars and let’s say I go to sell my business..
    I’m gonna lose about 400,000 of that million dollars to taxes and fees to sell my business so my business is not really worth a million dollars, it’s really worth $600,000 and of that 600,000 I can only spend about $24,000 a year. So you might think your business is worth a whole bunch of money and it looks like it’s worth a whole bunch of money but at the end of the day it’s not worth nearly as much as you think it is in retirement.

So if you can wrap your head around these concepts you’ll know enough jargon around cash flow that you can understand what your accountant or other professional is talking about on this topic and it is a really really important topic.

So why don’t you scroll down and leave a comment about jargon and more specifically cash flow jargon. And, while you’re at it Download Our Free Infographic on the success path for creating all the cash you need with our infographic on Cracking The Cash Flow Code.

Hey, this is Josh Patrick. You’re at the Sustainable Business. I hope to see you back here really soon.

Topics: Video, growth program, money jargon, jargon, four needs of cash, business jargon, balance sheet, profit and loss statement, Sustainable Business, lifestyle money, cash flow statement, cracking the cash flow code, emergency fund, cash flow, retirement plan, cash flow jargon

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