167: If I Had to Learn Finance All Over Again, Here’s What I’d Do

Why do so many businesses struggle with cash flow—and how can you avoid the same fate? In this episode, Steve reveals one of the biggest hurdles he sees business leaders face: a lack of financial literacy. But it’s not about complex accounting—it’s about understanding the story behind the numbers so you can take action.

Steve shares his journey of learning the basics of finance and why getting these fundamentals right could be a game-changer for your business. From income statements to balance sheets, he breaks down the essentials that all business owners need to know. Tune in to learn how understanding your numbers can help you make smarter decisions and set your business up for long-term success.

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.

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Transcript

The number one reason why most companies fail or go bankrupt is cashflow or a lack of understanding of how cashflow works. And one of the biggest obstacles I see with business leaders trying to grow and run companies is a lack of financial literacy. I'm not talking about being a nerd, doing debits and credits in the back office and celebrating when your trial balance ticks and ties. Instead, I'm talking about basic business financial literacy. In other words, understanding the story behind the numbers so you can go out and do something about it. See, the most successful people that I know in business are those that can look at key performance indicators or look at numbers on a financial statement and then go put in place actions that will drive their strategy forward to make their business more profitable, more cashflow rich, more valuable, right?

So if I had to start over from zero, no MBA, no fancy degree, no CPA, no spreadsheets, no finance background at all. Here's exactly where I'd begin. Now, recently in my life, I signed up for Jiu Jitsu. There's a gym right by my house. They have classes at six in the morning and everybody there is amazing. But I'll tell you, going to Jiu Jitsu in the morning as a white belt, somebody who is completely uncoordinated on the mat. Now, I wrestled in high school, so that helps, right? So I can move my body and I know some basics about takedowns and working from the ground. But overall, they're doing moves and I'm like, okay, what are you doing? Your arms going over and under and then you're locking the leg and I just feel like a fish out of water. It's totally uncomfortable. And in fact, I think it's my second class, one of the more senior belts, right? I think he is a purple belt. He came to me. He's like, Steve, just don't quit. Don't quit as a white belt. It sucks as a white belt because you're learning. You're trying to understand your body. You're trying to understand the moves, just the basics. It's totally awkward. It's uncomfortable and it may feel very painful at first, but just don't quit.

So if I had to start over again and learn finance, would I do it? Absolutely. I spent eight years of my life and a lot of money learning accounting and finance. And in fact, I did my undergraduate in accounting and finance, but it didn't work out that way. My undergraduate degree was actually in finance and marketing. I even went to Costa Rica and I did the study abroad program for a couple of weeks. And I was so close to graduating with this marketing and finance degree, this dual degree. Then at the very last minute, I decided to change from marketing and go towards accounting because I wanted to learn not just how to build financial forecasts and financial models and valuation models and do all the finance stuff. I wanted to learn where the numbers were coming from because I think that's a huge strength. If you are in the world of financial planning and analysis, which is known as FP&A, if you're a CFO, or maybe you have some other financial role in your company, if you're given numbers from accounting, right? So you get the historical income statement and balance sheet and statement of cash flows, and you're tasked with building out forecast. And you started doing that from historicals, but you don't understand where the numbers are coming from or how the financial statements connect. I think that's a huge vulnerability. And that's why I decided to get my degree in accounting and finance combined, which I'm so thankful that I did that.

Then I went on and I got my CPA, I got my master's in accounting, and then I went and got my MBA from the Fuqua School of Business, great program. And I specialized in strategy, but my program was heavily weighted towards accounting and finance as well. So I spent a lot of time and a lot of years studying finance. Then I got out, I went and worked for Ernst & Young, and I had that experience in public accounting. I spent thousands and thousands of hours in my life, in Excel, in financial models, diving through financial statements. And then I went out and started Coltivar. That's the company I run right now, where I provide strategic and CFO level support for companies. And I spent a lot of time with my team in the numbers. Okay. So this whole journey has taught me the shortcuts in the fast track to gain financial literacy.

Because even after certain milestones, for example, after getting my master's in accounting, there were concepts that I finally understood. Maybe I'm just a slow learner compared to everybody else. But I was like, wow, why didn’t somebody just explain that to me back in the day? For example, I really struggled with debits and credits. And I was like, is this a debit? Or is this a credit? Especially on the liability and equity side of the balance sheet. And if you think about equity, for example, it’s derived from retained earnings, which is accumulated earnings of the company and net income for the current year, and distributions and contributions, right? So it’s money put in, money take out, and the accumulated earnings, including the current year's net income. That’s equity.

I thought that’s so confusing. And then when it came to making journal entries—because think about net income, that comes from the net of revenue and expenses, right? So that’s where the journal entries are hitting equity—I was like, okay, revenue, is that a debit? Or is that a credit? And then I always had to think it out and then I’d get it right half the time. And then same thing with expenses, and I’d get them all backwards. And then one day somebody just said to me, they’re like, think of it like this, Steve: managers and leaders, they want to take credit for good things, right? I’m like, yeah, they want to take credit for good things, right? They want to prove to the company that they’re great leaders. So revenue—do they want to take credit for that or do they want to take credit for expenses? I’m like, they want to take credit for revenue.

And they’re like, okay, so if you want to increase revenue, it’s a credit. If you want to decrease revenue, it’s a debit. It’s the opposite. If you want to increase expenses or record an expense, it’s a debit. It’s not a credit because managers don’t take credit for bad things. They take credit for good things like revenue. And I was like, light bulb—ta-da! And I was like, why didn’t somebody just explain that to me back in the day? Because that would have eliminated a lot of heartache. So that’s the same thing with financial literacy. If somebody’s teaching you financial literacy—and maybe I do a terrible job on this podcast and in my course, on my YouTubes, I don’t know—but if somebody’s teaching you financial literacy and it’s overly complicated, yeah, your journey is going to be so much longer.

So same thing with Jiu Jitsu. If I have a professor and he’s not a good professor, guess what? It may take me 10, 15, 20 years to get a black belt instead of fast-tracking my path. So if I had to start all over again without any of this, number one, I would learn how to read the income statement. Number two, I’d learn how to read the balance sheet. And number three, I’d learn how to read the statement of cash flows. Okay? So overall, I’ve learned how to read financial statements.

Let me walk you through these real quick. And this is fresh on my mind because yesterday we just got done doing a quarterly strategy review. We call them QSRs with one of our clients. And in that meeting, we had the owners and we had some other leaders in the business, and we’re walking through the financials and some job profitability analyses that we put together for their company.

When it comes to the income statement, that’s the first financial statement we looked at. I always say the income statement is like, yeah, that’s good, right? That’s table stakes. You have to learn how to read the income statement so you can see how much revenue is coming in, how much expenses are going out, and how much profit is left at the end of the day. But it’s not the most important one.

And one of the leaders was like, Steve, didn’t you say that the income statement doesn’t matter? I’m like, it does matter. It does matter, so don’t misunderstand me, because it is a critical financial statement. It’s just not the most important one.

But here’s what I know with the income statement. Number one, the income statement helps you to understand: does the company perform well? Can they price their products correctly? Can they go out there and sell, right? Are they efficient at sales and increasing volume?

When it comes to the delivery and fulfillment of the products and services that it’s selling, can they manage their cost effectively? That’s their cost of goods sold. Then can they maintain an appropriate level of operating expenses so they’re delivering value where it matters the most, while not incurring additional expenses that won’t allow the company to be profitable?

Those are the four levers I just gave you: pricing, volume, cost of goods sold, and operating expenses. Those are the four levers you need to know from the income statement. And if you just go through the line—like revenue is your top line on the income statement—that represents the amount of sales the company’s doing, the amount of income they’re generating from selling their products and services.

You look at revenue. And if you just think of those two levers, pricing and volume, that’s how you increase it. So if you’re looking at the income statement and you see revenue declining, then you know, I got to fix our pricing or I got to fix our volume.

How do you fix your price? Well, you may improve your offer so you can charge a premium price. You may have to increase the perceived quality of your product. You may have to decrease the time delay between when somebody signs up for your product and when they get the results that you’re promising—because people will pay for speed to value.

Maybe there’s friction in your business compared to another business. If you reduce that friction, it may make your product more valuable so you can charge more. So there’s this perceived quality and perceived value with your products and services that you can improve to get a higher price.

Or maybe you enhance the customer experience so your prices are a little bit higher, but customers are willing to pay for that because doing business with your company is streamlined. There’s not a lot of friction. It’s just a great overall experience. It makes them feel good working with you, and therefore they’re willing to pay a premium price.

That’s pricing. Then when it comes to volume, it’s about your outreach. Is your outreach effective? Are you getting enough leads? When you get those leads, do you have a strong funnel to convert those leads? What’s your sales process look like? Do you have a strong script? Do you have scripts that work? Do you do sales training?

There’s all these things to increase volume. And there are other strategies to increase volume, like entering new markets, doing partnerships, or running promotions. There are a variety of things to increase volume. I’m just giving you some examples to understand how these levers work.

And then with cost of goods sold, that’s the next line item on your income statement. You’re going to want to understand material costs, direct labor costs, subcontractor costs, and other direct or indirect costs related to fulfilling the product or service are hitting this area.

So when you understand the accounts that are in cost of goods sold—because that’s your third lever—you know, hey, if I need to improve my material costs, maybe there’s some strategies to buy in bulk. Maybe I can negotiate better pricing with my suppliers. Maybe I can redesign the product so it uses less material, or you have less waste with your material.

Or you look at your direct labor—that’s usually the biggest cost in a company—and you think, how can I make it more efficient? How can I eliminate all the bottlenecks, all the bureaucracy? How can I invest in equipment so my team is more efficient out in the field? How can I engage in more training so my team is more productive? So you’re increasing the return on your labor, and that’s effectively going to drive your cost of goods sold down.

Then when you move on to operating expenses, it’s about looking at your business and thinking: do we need all this overhead? Could we be more efficient with our overhead? Could we keep the same overhead and grow the business one, two, three, four times, right? And that will make your overhead smaller as a percentage of your revenue.

So if you understand these concepts—not super complicated, right? Like at the beginning, I’m not talking about doing all these debits and credits and knowing the code AFC216 to be financially proficient—I’m just talking about the basic levers so you can look at a financial statement and say, dang, our cost of goods sold is up, which means our gross margin’s down. Here are the three things I do to fix it. Our overhead’s high. Here’s what we need to do to improve profit, right?

So you got this. You could do this. You could totally do this. And if you don’t have financial literacy, guess what? It’s not your fault.

And even if you went through an accounting program or a finance program back in school and you’re like, I still don’t get how it works—guess what? It’s not your fault. It’s because people don’t understand the fundamentals, so they just fill education with a bunch of garbage.

Okay, that’s my rant.

Okay, let’s go to the balance sheet. The balance sheet is organized in three sections: assets, liabilities, and equity. And in fact, the accounting formula is:

Assets = Liabilities + Equity

That’s how the balance sheet balances. You have assets on one side; you have liabilities and equity on the other side.

Think of it like this: if you buy an asset—like a truck or a tractor—for your business, in order to buy that, you either need to have a liability (take on debt like a loan), or you need to have equity (money that you or investors put into the business to fund the purchase). So let’s say you have a truck for $50,000—that’s an asset. You took out a loan for $40,000—that’s a liability—and you put $10,000 down with your own money—that’s equity. The $40,000 loan plus the $10,000 down payment equals the $50,000 asset. That’s how the balance sheet equation works.

On the assets side, it’s broken down into current and non-current (or long-term) assets.

Current assets are things that can be converted into cash within 12 months. This includes cash, accounts receivable (the money your customers owe you), inventory, and prepaids (like prepaying your insurance).

Non-current assets are things that last more than one year. These include property, plant, and equipment (PP&E). Don’t get confused by the term—this is just stuff like trucks, trailers, and buildings. Typically, anything that has a useful life over one year and costs more than a certain threshold (like $2,500) is considered a capital asset and goes here.

Then on the liabilities side, same thing: you have current liabilities and non-current liabilities.

Current liabilities are things due within 12 months. These include accounts payable (what you owe your vendors), payroll liabilities (the taxes you withhold and owe to the government), credit card balances, and anything else you’ll have to pay off soon.

Non-current liabilities are debts and obligations that extend beyond 12 months. Think of long-term loans or leases.

Finally, there’s equity. Equity includes the money you’ve put into the business (capital contributions), the money you’ve taken out (distributions), and your retained earnings (the profits you’ve kept in the business). The current year’s net income also shows up here, which is how the income statement ties into the balance sheet. That’s the bridge.

For example, your income statement flows through to net income, and that net income rolls into equity on the balance sheet.

Let’s now talk about the statement of cash flows—this is my favorite financial statement because it gives you the truest sense of what’s happening with your money.

The statement of cash flows shows where your cash is coming from and where it’s going. It’s broken into three sections: cash from operating activities, cash from investing activities, and cash from financing activities.

The statement begins with net income (straight off the income statement), and then you adjust it for non-cash items like depreciation, amortization, or gains/losses on asset sales. You also make adjustments for changes in working capital—meaning changes in your current assets and liabilities (like accounts receivable, inventory, and accounts payable).

For example, if your accounts receivable goes up, that’s a use of cash, because your customers owe you more and haven’t paid you yet. If it goes down, that’s cash in. You do similar adjustments for inventory and payables.

When all the operating section adjustments are made, you get your net cash from operating activities—basically, how much cash you generated (or burned) from running your day-to-day business.

Next is investing activities. This includes purchases or sales of long-term assets (like equipment). Buying equipment is cash out; selling it is cash in. You’ll also see things like investing in other businesses here.

Then you have financing activities, which includes things like: borrowing money (loans or lines of credit), repaying loans, receiving investor funds (equity), paying dividends or owner distributions.

At the bottom of the statement, you take your cash from operating + investing + financing to get net change in cash, and then you add your beginning cash balance to get the ending cash balance, which should match the cash account on your balance sheet. That’s how all three financial statements connect.

So if you just understand the movements between the financial statements and you understand the levers because the other four levers that I didn’t talk about yet relate to the balance sheet and the statement of cash flows. So the other lever of cash flow, and I’ll just give you a quick recap. Remember on the income statement, it’s pricing, volume, cost of goods sold, and operating expenses.

Move to the balance sheet and you have accounts receivable, the amount of money your customers owe you. Inventory, all the stuff you’re buying to build your products and services, or if you’re running a retail shop, all that inventory you’re carrying in your store. And then you have accounts payable, the amount of money you owe your vendors, that’s coming off the balance sheet. And then the statement of cash flows, the last lever is CapEx, the amount of money you’re spending to buy property, plant equipment, like trucks, trailers, et cetera.

Those are the eight levers to improve cash flow. And I just gave them to you. So you got this. Trust me, you have this. Don’t let it be so complicated. If you just look at the numbers on the income statement, the balance sheet, the same in cash flows, you understand the levers. Then you could be sitting in meetings and you could be looking at the financials and you’re like, yeah, look at our gross profits down.

Here are the three levers, pricing, volume, cost to get sold. These are the three things we could do, or hey, our working capital is going up. Let’s look at our accounts receivable, our inventory, and our accounts payable. Those are the main levers. There are other things within current assets and current liabilities. I’m just giving you the main levers, but see how that all comes together.

Then you can speak intelligently. Then you can run your business successfully. Then you can monitor cash because I just gave you the eight levers of cash flow. So if your cash flows down and you’re looking at your statement of cash flows, you’re like, our cash is decreasing. You know the eight levers to pull, that’s it. There’s not 10, there’s not 20, there’s eight.

If I would’ve just been taught that from the very beginning, oh my gosh, my life would be so different. It’s akin to doing jujitsu and me just jumping in and spending, you know, six months in one-on-one private sessions with the black belt. Imagine how fast my skills would increase versus doing lessons with a bunch of other white belts.

That’s why I created the financial pro program for you. That’s why it’s totally free. It’s a hundred lessons. Just go on to boosting your financial IQ, byfiq.com and sign up. It’s easy. You don’t have to take all a hundred lessons. Just take a few, find the areas where you feel like you’re weak or where you need the most improvement and cherry pick them, or keep listening to this podcast. It’s just repetition. I can’t go into jujitsu and be like, I want to be a black belt.

I’m going to show up two classes, maybe once a month. And I’m going to do this for like six months. And I want a black belt. Number one, that’d be terrible. Can you imagine wearing a black belt around and you’re not trained? You look like an idiot. So the same thing is true.

You don’t want to like fake it till you make it with finance, or you’re going to look like an idiot. You’re going to be sitting in a meeting with your bankers or with investors, if you’re running a company, and they’re going to ask you a question and you’re not going to know what the heck you’re talking about. And they’re going to see right through you.

You can’t fake that. That’s why financial literacy is so important. And that’s why I’m so passionate about it. And that’s why I’m so glad that I’m back. The one thing I want to do differently though, this time around with BYFIQ 2.0 is I want more engagement with the community. So some of you leave comments and I love that.

If you don’t want to leave a comment below, like if you’re on Spotify, there’s a place down below you can like type in a comment and I get those comments and I can respond. You can always send me a DM through LinkedIn. Just look me up on LinkedIn and DM me and I’ll do my best to respond.

Sometimes I get a lot of messages and I can’t respond to every single one as quickly as I want to, but I try to respond to every single one. So DM me, connect with me and help me to make this podcast even better by giving me your feedback and tell me the things you’re most interested in.

All right. I’d love to connect. That’s what I have for you today. I hope you have a great week and until next time, take care of yourself. Cheers.