Business Profit Maximizer #2 – How To Read Financial Statements

Business Profit Maximizer #2 – How To Read Financial Statements

(intense, music) – So let me ask you a question. If you can’t read the
score, how do you know, how can you tell from
winners from the losers? Winners from the?
– [Audience] Losers. – Let me ask you what kind of,
when you see this scoreboard, what kind of game is this? What is that?
– [Audience] Football. – Football? Football, okay. How many of you don’t understand football? Because I don’t understand football. You look at this home,
visitor, down, ball on, to go. What the fuck does that mean?
(laughter) Like who’s winning here? What’s going on? Because we don’t understand
the language of the game, yes? Okay let’s show me another one. What kind of game is this? – [Audience] Basketball.
– Basketball, yes. How many of you don’t
understand basketball? You’re looking, well, okay,
this is Vikings, Wildcats, shot clock, period, player fouls. What the fuck is T.O.L.? Like what is, what is going on here? Same thing, if you don’t
understand the rules, you can’t read the scoreboard,
how could you tell? How could you tell? And that’s the thing. You’ve never been taught
how to read the numbers, how to read the numbers. So accounting is not the scoreboard. Accounting is the report
card. Accounting is what? The report card. When you go to your banker, your banker, it is from Rich Dad Poor Dad, he’s not gonna ask you
about well, you know, what kind of grade did you get in school? You know what’s, what’s your score? Did you, did you get all A’s in business? So I can make you this loan. What are they asking for? What is it? (audience mumbles) Yeah, your financial statements. They look for your financial statements. Your financial statements
are an indicator how well you actually understand money,
how well you manage money, and how well you would, more, well likely to pay back the
loan he’s gonna give you. You could be oh well, I’m a very nice guy. You don’t show me your
financial statements. I don’t care how nice you are,
you ain’t getting a loan sir. Right? You could be not so nice, but
looking at financial statement I’ll give you a loan. Banks, it’s how they work. They loan you money
when you don’t need it. They loan you money
when you don’t need it. It’s funny because when I had no money, I tried to get a line of credit and they just would not give it to me. Baby line of credit. They
would not give it to me. Now they’re fucking calling me, you know Dan you need some money? I said I don’t need the money. No, you need some money?
Line of credit? Credit card? What do you, what do you need? Mortgage? Tell me. Please. We’ll loan you some. I don’t need the money. I’ll call you back next week.
(laughter) Maybe you need some money then. What about your partners? Know anyone that needs money? ‘Cause how does, how do banks make money? (audience mumbles) Yeah, they make money
by loaning money out. So they have a quota they didn’t meet. They need to get the money out. And most likely if you
understand how banking works, they’d prefer to loan a whole
bunch of money to one person. Believe it or not, if
you understand financial, and you actually accumulate
a certain amount of wealth, it’s actually easier to owe
a whole big chunk of money, than like a little bit of money. (laughter)
Yeah. They, they would, yes right? Tammy knows. They don’t, they don’t want to loan, oh fuck it’s only ten grand? Come on, like, yeah, they want,
a million bucks let’s talk. ‘Cause think, ten grand a pop, it means how many applications
they have to process. To get to a million. One
million. Good track record. You’ve got assets.
Knows financials. Great. I’ll, million bucks here you go. Awesome. Right? Let me go play golf. That’s how bankers think.
That’s how bankers think. So, there are, so we
talk about the cockpit, as a pilot to a business we need to read, learn to read the dials, yes? There are three, how many? – [Audience] Three. – Three dials that you have to understand. You have to understand. So the first one is one
I call a balance sheet. What is it called?
– [Audience] Balance sheet. – A balance sheet. Now with a balance sheet, (marker scraping)
which you have, balance sheet, not B.S.,
balance sheet, okay? So, make it very simple. On balance sheet you have, now forget, I don’t wanna get so complex
with these accounting terms, okay, so I’m gonna use my
Dan Lok terms here, okay? Let’s, on the balance
sheet you have what I call things and stuff.
(marker squeaking) Okay, how many can
understand things and stuff? Okay, things and stuff. Things and stuff. Now, give me an example. What are some of the,
the, in accounting terms it’s called assets but
what are some of the things and stuff you have in your business. (audience mumbles) Car, okay, so vehicle, yes. Technology, good. Office yes. Is cash part of it? – [Audience] Yes.
– Yes, cash, okay. (audience mumbles) Property yes, if you’re,
if you have a property that you occupy, your retail
location property yes. Ah, receivable. Now, also, question. Is, is good will some
of the things and stuff? – [Audience] Yes.
– Yes. Your brand. Good will, yes, okay, accounts receivable. So, you have some things and stuff here. And then you also have, so
in terms of things and stuff, you either own your things and stuff, or you owe things and stuff, okay? So, repeat after me. Either own things and stuff,
or you owe things and stuff. Now, when you own things and stuff, we call that equity right? Equity. When you owe things and
stuff we call that liability. Okay, so owning and
owing. Things and stuff. How many are following
what I’m saying so far? So good yeah? So far so good? Yep. Things and stuff. Now, now the balance sheet is
nothing more than a snapshot. A what? Snapshot. So everyone does this with
me. Just engage and do that. Just take a tsk tsk. Yeah, a snapshot. So it always has a specific day. It’s a snapshot of,
snapshot of what happens in any given time. So it has a snapshot in time, it always has a single specific date. Always a single specific date. Now balance sheet shows what a company owns and what it owes. Very simple. Things and stuff, right? Things and stuff. And how much money is tied up in terms of cash or receivable inventory or equipment. Balance sheet. Now, first question for you is this. How many of you get a
balance sheet once a year? Okay, once a year. How many get it once every six months? Okay, how many get it every quarter? Okay, every month? Okay. Balance sheet. A snapshot, what is happening. Then you have what I
call an income statement. A what?
– [Audience] Income statement. – Income statement.
(paper flapping) So with income statement. Now think in terms of income statement. With an income statement,
an income statement is a theory, it’s a what? – [Audience] Theory.
– It’s a theory. Now, for those of you who
understand accounting, bear with me here, you’re
like no, what do you mean Dan? No it’s not theory. An income
statement is income statement. It’s a theory and I’ll
explain why in a minute. Now, there are different, in
income statement you have, of course, sales right? Revenue, so sales. Now if you’re selling a
product where you have sales, you also have what they call
cost of goods sold, right? What does that mean? Yeah, how much it cost to
make those things right? How much it cost to make those things. So when you sell, your
sales minus cost of goods, is what, becomes your? – [Audience] Revenue. – It’s called your gross profit. Okay, it’s called your what? – [Audience] Gross profit.
– Gross profit. Okay, your gross profit. And then, now when you’re making sales, do you also have some expenses, yes or no? – [Audience] Yes.
– There’s some expenses. What are some of the
expenses. Yell the answer. (audience chattering) Gas, yep. Advertising, yes. Rent, good. Commissions payout yeah. Someone said that over there right? Huh? Utilities, yes. Utility, keep the lights on, right? Equipment, expense, yeah
office equipment, yes. If you’re leasing equipment. Yeah, taxes. Now, so look at, look at it. So, what happens is, most
business owners they get, the income statement. What’s the first, what’s
the number they look at? (audience chattering) How many look at that
number immediately, right? What is my net income? It, in this case it says $18000. And you look at the net income. If the net income is
higher than last year, you go have a drink. (laughter)
Right? If the net income is lower than last year, you will have two drinks.
(laughter) Right? Two drinks? Now you wonder why a lot of
entrepreneurs are alcoholic. (laughter)
Two drinks. So you look at numbers, you look at okay, that’s what’s going on. But here’s the problem with that. It is a theory. It is a theory. It is not actually how
much money you’re making. Because you can’t go to the
bank and deposit profit. You don’t go to the
bank and deposit profit. You go to the bank and deposit what? Cash. Cash. So that number could be very misleading. Income statements can be very helpful, but it can also be very dangerous. They can be what? Dangerous. The number at the bottom of an
income statement is not cash. And cannot be spent. Cannot be spent. So don’t think in terms of oh yeah, okay, that number looks okay. Then I’m okay. No, no, no, no. No. The number at the bottom
of the income statement, it’s not cash, and cannot be spent. Very key. Just for now
remember that. Got it? Okay. Stay with me. You awake? – [Audience] Yes.
– Okay. Stay with me here. Now, let me ask you a question. Is it possible for a
business to have $50000 in profit have no cash? Yes or no?
– [Audience] Yes. – Why? Give me an example. (audience mumbles)
Speak up. (audience mumbles) They go, okay so it shows a profit, but maybe they have not
collected the money yet. Okay, it’s possible. What else? What other scenario? Is it, how is it possible? $50000 in profit and no cash. – [Woman] They spent all the money. – Yeah, they spend money,
maybe they buy new vehicle. So it shows a profit but
they spend the cash, yes? That’s awesome. Inventory, yeah. So it could be that,
yes, we have $50000 in, in profit but then we
invest a lot of that cash buying the next quarter inventory, yes? – [Man] But is all that final
result tied up (mumbles). – I canceled some of
that so if Arrow’s case is going accounts payable, right? Accounts payable and accounts receivable. So, or now, let me ask you a question. Could you have $50000 of losses and have $100000 in cash? – [Audience] Yes.
– How is that possible though? (audience mumbles) Hmm? Okay, so, so yeah. You know you have $50000 is your losses, you have some accounts payable, you owe some people some money,
you haven’t paid that yet. So you still have the cash right? Okay, how many have done that before? (laughter)
So bad. Okay, but what other scenarios? How could you have? Yes? – [Man] You book your
expenses ahead of time so you’ve already paid your
expenses for next month on the income statement which
in theory is not actual cash. – It’s not actual cash. Very
good. Very good Ryan, yes. Yeah, you could also be,
you have $50000 in losses. But maybe that you’re
running on some money that you borrow from, from a friend. A hundred grand. Hundred grand
cash and put in the business. So it likes you have losses,
but you actually have some cash in the bank account. Does that make sense? So can you see how if you just
look at an income statement, it could be a little bit dangerous? If you try to make your
business decisions based on okay, I think that’s what’s going on, but it may not be
actually what’s going on. Okay, it’s like you go to your doctor. And you, how many of you regularly like do body checkup and stuff like that? You should do that once a year right? You go there and look
at, you go see a doctor, and you, the doctor
looks at these numbers. Hmm, cholesterol, you know this and that, and go through all that. Nah, I have no idea
what these numbers mean but I think you’re pretty,
you’re pretty healthy. (laughter)
Right? And then you look at the numbers like I don’t know the fuck,
what does this mean doctor? I don’t know. I don’t know. So, as an entrepreneur we
need to be able to interpret, what was the word? – [Audience] Interpret. – What these numbers mean. We need to turn, convert
those numbers into the story. What are the numbers telling us? What is the story behind the numbers? You don’t, I’m not trying to turn you into a bookkeeper or an accountant, no. I’m trying to get you to understand some of the fundamentals,
so that when you look at some of these numbers, oh yeah, this is what I need to work on. That’s what my business needs. That’s a lever I need to
pull in, within my business, versus I have no idea what this means but let’s just go out there and grow and generate more revenue. Does that make sense? Cool. So running a business out of
a checkbook or tax returns, or looking only at net profit, are very poor ways to run a business. Or determine the financial
health of the business. It’s very, very misleading. You look at a net income and
say oh, I think I’m doing well, I think it’s going up every year. It’s very, very misleading. A lot of entrepreneurs,
especially sole entrepreneurs, they look at the tax returns. Imagine you get your tax return, here’s how much back taxes
you owe, how much you pay. What does that tell you
about your business? – [Audience] Nothing.
– Nothing. It just tells you how
much taxes you gotta pay. Does that mean like, my comp,
my margin is going down, is it going up, am I
bringing more clients? Am I spending too much money
servicing those clients? Do I need to hire more people? Am I paying too much for my employees? What the fuck is? I don’t know. But you look at a tax return,
I guess I’m making more money. I’m making less money, I don’t know. But that’s how most entrepreneurs operate. Do you see how dangerous that is? Yeah, it’s very, very dangerous. Very dangerous. So, and then we have the third dial. Which is the most important one. It’s what I call the cash flow statement. What does that mean? Cash flow, statement. Now a cash flow statement is not a fact. And no, I mean it’s not
a theory, it is a fact. It’s not theory, it’s a fact. It is a fact. From the
cash flow statement. Cash flow statement. And you notice, actually
most entrepreneurs, when they file their tax return
they get the balance sheet, they get the income statement, very often they don’t have
the cash flow statement. They just look at those two. When this is actually a fact. This is actually how much
money you have, okay? You look at that now,
but here’s the thing. Cash, so let me ask you a question. So for cash flow, what
are we measuring here? (audience mumbles) No, for cash flow what are we measuring? – [Man] Cash flow.
– Cash right? Cash flow. So cash is the real money. It’s money that hits your bank account. The answer’s what you
use to pay your bills and employees and rent. It’s actually, listen to this. Cash is what you use to pay your bills, and employees and rent. Cash is you use to repay lenders and provide shareholders,
you with returns. You go to the bank and you deposit cash. Cash. And in fact, say it with me. Give me some cash. – [Audience] Give me some cash. – Yes, give me some cash. Everybody, give me some cash. – [Audience] Give me some cash. – Yes, give me some cash. And not all cash is created equal. Not cash, or not all cash is created? – [Audience] Equal. – There are actually
different types of cash. What do you mean Dan? There are actually
different types of cash. There are three types of cash. How many? – [Audience] Three.
– Three types of cash. You have first what I call operating cash, or operating cash flow. It’s called OCF. It’s called what? OCF. Write this down. This is cash generated
or used by the operations of the business. Generated or ca, or used by
the operations of the business. Operating cash. Operating cash. And then you have what
I call investing cash, or investing cash flow. Write this, write this down. ICF, what’s it called? ICF. Investing cash flow. This is cash generated or used in buying or selling fixed assets. Now what are fixed assets? We’re talking property,
plants, and equipment. Or PPE. A lot of people like to refer to. Property, plant, and equipment. I.E. you have a piece of property,
you have retail location, you sold that piece of property
or sold that piece of land, or sold that factory, and you got money. That would be investing cash. Does that make sense? Fixed assets. Investing cash flow. And then you have what I
call financing cash flow. This is cash generated, used
from lenders or investors. Let’s say you put in some money, or you family put in some
money into the business, put in some cash in the business. That’s financing cash,
okay? Financing cash. Or you borrow money from the bank. That’s financing cash.
Financing cash flow. FCF. What’s it called? FCF. So financing cash flow, FCF. So we’ve talked about three dials, right? What’s the first one? What’s the first one?
(audience mumbles) Balance sheet. What’s the second one? (audience mumbles)
What’s the third one? (audience mumbles) How many types of cash are there? – [Audience] Three. – And there was a first one.
(audience mumbles) What’s the second one?
(audience mumbles) What’s the third one?
– [Audience] Financing. Okay take two minutes, how long? – [Audience] Two minutes. – Discuss among the table
what you’ve learned so far. Okay, two minutes, go. – [Announcer] 10 times your finances. 10 times your business. 10 times your marketing. 10 times your life. Hit the subscribe button now.
(intense music)

24 thoughts on “Business Profit Maximizer #2 – How To Read Financial Statements”

  1. Thank you, Sifu Dan, for teaching me about cash and profit in order to assure my business is running healthy.

  2. Defenitely would like to hear more interpreting of those figures especially in planning future development of particular business.

  3. I like this video because is breaks down a lot of complex "basic" financial stuff in terms I can understand! Please do more videos like this. 🙂

  4. I feel like these are the fundamentals of how warren buffet made his money, learning how to interpret the financial lingo allows you to understand the true wealth of the company

  5. Учу бесплатно, каким образом можно делать пару раз в сутки до 65 дол. на свою банковскую карту. Изучите вuдео у меня канале

  6. I had to stop watching a minute and a half in. I don't need the profanity, the camera wouldn't even show what he was pointing at, and the whole intro seemed like a display of ego. Good on him for being wealthy, but this was a bad video.

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