157: Let's Play Cash Flow Trivia

Send us a text

Master business finance for free with 100+ video lessons—no gimmicks, no hooks, just valuable knowledge: https://www.byfiq.com/

Think you understand cash flow? Steve puts your financial knowledge to the test in this interactive trivia-style episode.

From the difference between profit and cash flow to why profitable companies still go bankrupt, this episode breaks down key financial concepts that every entrepreneur and business owner needs to know. Whether you're a finance pro or just getting started, this one will challenge what you think you know.

Are you ready? Let’s play.

Disclaimer:
BYFIQ, LLC is a wholly owned entity of Coltivar Group, LLC. The views expressed here are those of the individual Coltivar Group, LLC (“Coltivar”) personnel quoted and are not the views of Coltivar or its affiliates. Certain information contained in here has been obtained from third-party sources. While taken from sources believed to be reliable, Coltivar has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation.

This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only, and do not constitute an investment recommendation or offer to provide investment advisory services. The Company is not registered or licensed by any governing body in any jurisdiction to give investing advice or provide investment recommendations. The Company is not affiliated with, nor does it receive compensation from, any specific security. Please see https://www.byfiq.com/terms-and-privacy-policy for additional important information.

Want to see if you’re a fit for our KPI Kickoff? Check it out here: https://www.coltivar.com/boost

Support the show

Episode Transcript

Speaker 1 (00:00):
Cash flow is king.
Cash flow in combination withreturn on invested capital is
really critical to consider.
This is BYFIQ.
Wealth and success come fromunderstanding how finance works
in business, and together we'llexplore the most important
topics to 10x your financialresults.
My hope is that we can worktogether soon.
Please share and enjoy.

(00:20):
Welcome to Cash Flow Trivia.
Today I'm going to be your gameshow host.
My name is Steve Coughran andwe're about to have a lot of fun
.
All right, it doesn't matterwhere you're at on the financial
literacy spectrum.
You may have zero skillsTotally cool, welcome to the
show.
You may think you're a masterat finance and if so, we're

(00:41):
going to put some of your skillsand knowledge to the test.
No harm, no foul, doesn'tmatter where you're at.
Like I said, let's just goahead and jump in with question
number one what's more important, profit or cashflow?
This is an easy one.
If you listen to my episodes,you're like Steve, come on, no
brainer, it's cashflow.

(01:02):
And if you answer thatcorrectly, then give yourself a
gold star, a pat on the back orone of those weird awkward hugs
where you're hugging yourself.
Okay, all right.
Nonetheless, it's cashflow.
Cashflow is the most importantthing you could have profit but
still run into a lot of issueswhich we'll get into here in a
little bit.
All right, so cashflow is king.

(01:22):
That's number one.
I told you I'd give you an easyone.
Let's go ahead and keep divingin deeper.
Question number two is EBITDA,which stands for earnings before
interest, taxes, depreciationand amortization.
It's just a nerdy way of sayingprofit.
Is it the same thing ascashflow?
I'll give you a few seconds tothink here.

(01:43):
Cash flow I'll give you a fewseconds to think here.
All right, if you said no, youare absolutely right.
So, although EBITDA is sometimesused as shorthand in valuation,
for example in themultiples-based approach,
sometimes investors or analystswill take EBITDA right.
They'll take EBITDA as a dollaramount and then they'll
multiply it by some type offactor in order to determine

(02:07):
firm value.
So, for example, a plumbingcompany may be valued at five
times EBITDA and therefore, ifthey're making a million dollars
in EBITDA, you multiply that byfive and bam, you get a
valuation of $5 million.
But EBITDA is not the samething as cashflow, and that's
something really important tounderstand.
And the reason why it's not,among others, is it doesn't

(02:30):
account for invested capital.
Now, invested capital has twoparts, working capital and net
property, plant and equipment,and since those two items aren't
in EBITDA, it doesn't equalcashflow.
All right, there's some othernuances there.
I'm not going to get into thenitty gritty, nerdy stuff.
I'm just going to keep it highlevel.
That's all you need to know forright now.

(02:52):
All right, question number threein valuation, specifically the
income approach, is a companyworth the present value of its
current cashflows or its futurecashflows?
In other words, do you take thecash flows of the company in a
given time period in the currentyear and discount it back into
today's dollars to determinevalue, or do you look at future

(03:15):
cash flows?
That's the question.
All right, here's a second tothink.
If you answered future cashflows, you are correct.
So in the income approach, ifyou're building a discounted
cash flow model, also known as aDCF model, you're looking at
the future cash flows of thebusiness over a forecast period
and you combine those cash flowswith a continuing value to

(03:39):
determine firm value.
So it's all about future cashflows.
And that's why strategy andfinance are so important,
because if you have a badstrategy in your business, guess
what your future cash flows maybe in jeopardy.
All right, moving on, we gottwo more.
It's part of this trivia game,all right.
Question number four if acompany has $1 million in cash

(04:03):
flow, are they creating value?
All right.
So if they're producing amillion dollars in free cashflow
, at the end of the day, afterthey pay all their bills, after
they account for their investedcapital, everything they're
producing a million bucks.
Are they creating value, yes orno?
All right.
If you said no, you areactually correct, because here's

(04:26):
the deal.
What if it required $2 millionin hard cold cash as an
investment in order to make thatmillion dollars?
Now, sure, we have to accountfor businesses being perpetual,
meaning that they're going tohave this ongoing life.
Theoretically right.
But in this example here, justto keep things really simple if
a company puts in $2 million incash, in this example here, just
to keep things really simple ifa company puts in $2 million in

(04:47):
cash in a given year and theyonly produce $1 million in
cashflow, they're destroyingvalue, because you put 2 million
in, you only got a million backand you're still a million
dollars in the hole.
That's why return on investedcapital ROIC and I talk about
this in other episodes is reallyimportant to consider in
combination with free cash flowto determine value.

(05:10):
Now, that was a little trickythere and a little bit more
advanced.
So if you got that right,you're on a good path, all right
.
Last question, question numberfive if a company is profitable,
if they're making profit right,net income, they have net
income, they have profit Canthey still go bankrupt?
All right, a few seconds tothink.

(05:32):
Okay, if you answered yes, theycould still go bankrupt.
Ding, ding, ding, you just gotyourself another gold star,
because, check this out, 70% ofcompanies that go bankrupt,
they're actually profitable whenthey close their doors.
Now, I've said this over andover again, so you're probably
sick of hearing it if you are inmy financial pro program or if

(05:52):
you consume my other content,but it's worth mentioning here
again because a lot of peopledon't understand this.
Profit is not cashflow, neverwas, never will be.
Profit doesn't pay the billsbecause, remember, there's
invested capital and there'sother stuff that you have to
consider that is not captured inprofit.
So cashflow is king and, as welearned with question number

(06:16):
four, cashflow in combinationwith return.
On brand new book I justpublished, it's free at
Coltivarcom.
Go to the website.

(06:39):
You just pay for shipping andhandling.
So I don't go further in thehole and I'll ship you out a
book, but you have to live inthe continental US.
If you want to just skip thewebsite and you don't want to
sign copy, you can access it onAmazon, and I've made it as
cheap as possible for Kindle 99cents right now is what it's at,
and that's the lowest I couldgo and still have it published

(07:01):
through Amazon, and there arealso other versions that you can
consume as well.
All right, I hope you enjoyedthis trivia game.
Even if you got zero gold stars, you can give yourself a gold
star because you're a winner andI'm your biggest fan.
All right, have a great weekand until next episode, take
care.
Give yourself a gold starbecause you're a winner and I'm
your biggest fan.
All right, have a great weekand until next episode, take
care of yourself.
Cheers.