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Financial Planning For Canadian Business Owners

Financial Statements Basics: Part 2, with Jason Pereira | E084

Ep. 84


Today is the second part of the continuation of a series that Jason is doing on understanding financial statements and some of the data. Today, Jason will move on to a couple of other less common reports and is going to look for the cash flow statement; this is not required for tax purposes, but every accounting software should be able to produce one of these. 


Episode Highlights:

  • 01:25 A cash flow statement gives you an understanding of what happened to your company’s cash and how you got from the starting position at the beginning of the year to the end position at the end of the year.
  • 01:39 There are three different categories or changes within the business that will impact your cash. 
  • 02:28 The first area that the cash flow statement looks at is operating cash flow. It is simply a change in your income statement and balance sheet that came from operations. 
  • 03:43 If your accounts payable went down, it means you have converted more of your accounts payable to cash. Therefore, you increase your cash and vice versa.
  • 04:04 Jason: Any expenses that count payable are positive to your net cash and any reduction is negative, leading to the change in current liability.
  • 07:11 If you issue any new debt, that new debt increases the cash on hand that you pay off in long-term debt and the reduction results in a lower amount of cash.
  • 09:31 Cash is important because it is the lifeblood of a business. You can be totally profitable with cash being the lifeblood, but you can have negative cash flow. 
  • 15:01 You have to be careful with your inventory because if you carry too much, it’s just money waiting to be converted that could be in your pocket, and if you carry too little, you could lose it on sales.
  • 16.49 The current liability, like loan payments, you don’t have much control over things. But, again, this is not an area that you are going to be able to reduce because if you have a loan, and you typically have scheduled payments.
  • 18:28 COVID has taught us that you need to access the cash when everything goes wrong, but there’s a difference between having cash in the bank and accessing the capital.
  • 19.06 If you don’t maintain enough working capital when you sell the business, it will impact your valuation. Working capital is an asset of the business. Too much of it, you can clear that out. Too little of it, you need to invest.


3 Key Points:

  1. Cash flow from investing activities reflects any investments you made in your business, specifically your business’s fixed asset component or balance sheet. 
  2. Investment in general matters because that investment can either be used for working capital or other business needs, or personal consumption of the business owners.
  3. If you could increase the duration of your pay and turn your short-term liabilities into long-term liabilities, you would reduce the need for working capital.


Tweetable Quotes:

  • “When you total up all aspects of cash flow, the difference should equal the change in value in your cash balance over the year.” – Jason
  • “Having a healthy amount of working capital is vital because you need to keep your business afloat, and there are ways you can optimize around this.” - Jason
  • “If we can reduce your pay, current assets, and inventory, you can reduce the need for working capital.” – Jason 


Resources Mentioned:

Facebook – Jason Pereira’s Facebook

LinkedIn – Jason Pereira’s LinkedIn


Transcript

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