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Unknown

You're listening to the Profit First for Real Estate Investors podcast. This show is all about helping real estate investors and entrepreneurs bring clarity and structure to the financial side of their business. In these sole episodes, we focus on practical financial strategies that real estate investors and business owners can actually implement, whether it's profit, cash flow forecasting or mindset.

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Unknown

The goal is simple to help you run your business with more confidence and less financial stress. Enjoy the episode. If you can't audit your books internally, your numbers can't be trusted. What does that mean? When I see a QuickBooks file, which don't don't don't log off this video just because I said QuickBooks. Because your numbers are so important to your business, it is the story of your business.

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Unknown

It is literally how you are going to attain financial freedom. You know why? Because it's not about the amount of deals or sales you do. It's about what you do with the cash and with the numbers that are on that bottom line. I want you to have a bottom line. I want you to know where that money is going.

00;01;03;18 - 00;01;20;13

Unknown

And if you cannot audit your own books, if you don't know what to look for, if you don't know where to search to be able to see. Hey, is someone stealing from us? Or a hey, am I actually making profit? Or hey, what is what are my cash accounts doing there? Like, how much do I have from lenders, funds or whatever it might be?

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Unknown

These are the things to be looking for inside of the books. And I'm just going to give you a very, very general overview of the profit and loss, the balance sheet and the cash flow statement and what to look for on each one. And what is each one about. And just this is going to be super high level.

00;01;35;14 - 00;01;51;16

Unknown

This is what you need to know as the CEO. I'm not going to dig down into each individual line item. These are you to be able to see. What should I be looking for? What might be out of whack? What would I be looking for as the owner, to make sure that everything is kosher on the books? Okay.

00;01;51;18 - 00;02;16;04

Unknown

Number one, let's go over the the profit and loss or sometimes called the income statement. Either one income statement or profit and loss. That's a very simple financial statement because it's literally the income minus expenses equals your net profit. If you're in real estate it might be income minus cost of goods sold like you have properties you're buying and a work in progress.

00;02;16;05 - 00;02;33;15

Unknown

And then once you sell the property, you have gross profit minus the expenses of the business to run the business to get your net profit. But at the end of the day, it's income minus expenses. It's what did we make minus what we spent to get. What is our bottom line? Now bottom line is different from cash. And that's what we're going to talk about on the balance sheet.

00;02;33;22 - 00;02;57;24

Unknown

But what you're looking for there on the income statement is does the income look correct. Like for the last few months did we actually make $100,000 last month? Do we actually make you know, what it's looking like up top? And did we actually make on the top line what from the I was projecting as the business owner, because usually business owners have some way of knowing what is the sales, what are the goals?

00;02;57;24 - 00;03;17;03

Unknown

What are the targets? What are my projections, some sort of system to be able to say, okay, how much are we projected to make? Then you look at the profit and loss and say, does that look accurate or is there any discrepancies? This is also where if you pull up your profit and loss, because lots of people just don't even have their log in to QuickBooks, they don't know how to get in.

00;03;17;04 - 00;03;36;26

Unknown

They don't know what they're looking for. You could even have the profit and loss or the balance sheet or the cash flow statement sent to you from your financial team, but somehow you need to be looking at those. So on the profit and loss statement, does the income look correct? If you're doing different types of deal transactions, you might even want to break down the different types of, you know, the way that you make money.

00;03;36;29 - 00;03;52;23

Unknown

So if you're a service provider, do you have an ongoing plus an upfront, or do you have like a one off service versus a recurring service? So you might be able to put different types of revenue inside that income statement. So that way you can see very clearly, do these numbers look correct or is there any red flags.

00;03;52;27 - 00;04;15;27

Unknown

The next is your expenses. This is usually the easiest to look out for of okay let me look at all these categories. Number one do I agree with all these categories. Are we spending money in all these areas. Number one. Number two all those numbers that we're spending in these areas, do they seem reasonable? Because if you're not looking at every dollar that's going out the door, which most owners are not anyway.

00;04;16;00 - 00;04;34;11

Unknown

We have to look at okay for marketing. We've been spending 15,000 for the last few months, but last month it says 25,000. Then it went back down to 15,000 this next month. This is where you might be able to dive in with an actual financial leader, or someone on your team to be able to say what happened here, like, why did it jump up so much?

00;04;34;16 - 00;04;57;02

Unknown

So this is where going in and looking at the expenses and saying, what looks off? And do all these categories look like this is what we're spending money on, or is there something like look for different accounts that say, either ask my accountant or suspense account or something like that, that is a trigger, or a miscellaneous account or an other account.

00;04;57;04 - 00;05;17;06

Unknown

If there's any of that work in that account on your QuickBooks file, or on that profit and loss, or dig into it, because usually that's either where the bookkeeper does not know where to place those funds. Or sometimes we've seen that to be a place where people hide the funds of like they don't want the owner knowing that they're spending money and it's going into just a random account.

00;05;17;09 - 00;05;34;02

Unknown

That's why you need to be looking at the numbers in the accounts and what you're spending, but then also the actual categories of those accounts on the expenses, on the profit and loss. So that's the profit. And loss. Because then at the bottom line you have the net profit, which is what are you really making from the business.

00;05;34;02 - 00;05;52;28

Unknown

Not necessarily what you're keeping cash wise, because that's a totally different video. You know, cash versus profit. But I wanted to always tell you that's what you're looking for. On the profit and loss. If you're going to audit your balance sheet. The balance sheet can be completely different depending on the business that you're running. But it has three main components to it.

00;05;53;06 - 00;06;13;10

Unknown

It has assets which is usually cash. Or if you're doing real estate investing it has properties as well. Two short term and long term assets. You might have a vehicle on there. You might have equipment if you're running machinery or something like that. A factory. You're doing things like you've got that inventory that's usually your assets okay. So assets liabilities and equity.

00;06;13;15 - 00;06;35;16

Unknown

Equity is where what is your business worth. Like what is the equity inside of your business. That's what is shown on that balance sheet. So there's where you have what are your assets. What are things that we own which is what assets are liabilities are what you owe. And equity is like what is your business worth. And that's usually where you have owner's drawers or where you have the compensation.

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Unknown

Like if you're taking distributions as an owner, if you're paying the taxes like on a different schedule, like it's usually sits there if you're taking profit draws, things like that, it's going to be inside of the equity. But you want to see how much is the business really worth? Or like what is the business equity? That's where it's found.

00;06;53;10 - 00;07;12;04

Unknown

It's often found on the balance sheet. If you have an asset account that's negative, that's a red flag. What do I mean. That means like you own a property. And because that property is worth $200,000, if it says -$200,000, you probably have an issue. You need to dig into it. Same thing if you have a liability as well.

00;07;12;04 - 00;07;30;22

Unknown

If you have a liability, it's like a negative liability. It's like, why do I have a negative liability? And the liability is a $200,000 loan. It's already on the liability side. If I have it negative it's just the opposite. So that's just a red flag. If you see anything that's negative on that the assets or the liabilities then it's like dig deeper into that.

00;07;30;24 - 00;07;50;29

Unknown

There might be a legitimate reason. It might be because they're the bookkeepers are in between doing journal entries or whatever it might be, but that would be a red flag to look out for. If you also just want to do some business management on the balance sheet. If your liabilities exceed your assets, then it's like, oh shoot, we have more wounds than we do assets.

00;07;50;29 - 00;08;11;05

Unknown

Whether it's the cash, you know, the cash and the properties, whatever it might be, all of your inventory versus your liabilities. It's like, okay, then we probably have negative equity inside the business and we're upside down. And we either need to make more sales and make more cash, or we need to be able to go out there and maybe sell off some of these things and get these loans off the books, because now we're upside down.

00;08;11;06 - 00;08;26;19

Unknown

We have more liabilities than we do assets we owe more than we own. And it's like, this is where that can get very dangerous very quickly. So that would be another red flag to look out for as well too. I'd be looking at all the accounts on there. Do they make sense? Just like on the on the profit and loss.

00;08;26;20 - 00;08;43;00

Unknown

But this is where you're going to be able to see is my business going to be healthy long term or not? Do we have enough cash? Can we cover all of our liabilities? Do are we building positive equity inside the business? Then the last statement is the cash flow statement. That one's probably too complicated to get very nitty gritty, but what are we on?

00;08;43;00 - 00;08;58;10

Unknown

The bottom line of the cash flow statement usually tells you month over month. Like what? At the beginning of this month? How much cash do we have at the end of the month? How much cash do we have in? Like, what's the difference? Do we gain equity or do we gain cash position? Like, did we have more cash than we had at the beginning?

00;08;58;16 - 00;09;25;25

Unknown

But it doesn't always tell the story unless you know how to read the cash flow statement and you could dig in. That's why you might need someone to come alongside you and help you to determine and understand the cash flow statement. But at the end of the day, it's really about do we have more cash or not? And do we know where that cash came from and is it from the profit of the company, or is it from loans from the you know, that we got into the company because that's really different and that would tell you like, is this cash really mine or is this cash someone else's that I'm just holding on to

00;09;25;25 - 00;09;42;23

Unknown

until whether we sell a property or whether, you know, like we finish a project and then we have to pay that one back, the cash statement is really about that. So these are some of the things to look out for. Because if your cash keeps going down month after month, that's a big old red flag saying why am I running out of cash in the business?

00;09;42;23 - 00;10;03;14

Unknown

Like why does it keep going down on the cash flow statement? That should be a red flag to be able to ask if you have a CFO, they can actually tell you if a bookkeeper, they might be able to say, well, here's some of the accounts, I don't know. Go figure it out. But this is where you would be able to dig in to say, why are we losing cash month over month in the cash flow statement can at least give you that red flag from the business owners point of view.

00;10;03;19 - 00;10;19;05

Unknown

So those are the financial statements, some of the things to look out for. Because honestly, no matter the business, you always have a profit and loss. You have a balance sheet, you have a cash flow statement. Those are some of the red flags, yellow flags to look out for. That way. You're saying, okay, is this something on the cash flow statement?

00;10;19;05 - 00;10;35;10

Unknown

Is our cash going down on on the profit and loss. Like why does the cash keep going down? Or like why is our net profit down? Or why is this account like, why do we spend 10,000 more this month than we do on a regular basis? Or why does this say ask my accountant or other or miscellaneous? Like what are we putting inside that account?

00;10;35;12 - 00;10;56;08

Unknown

This is where you need to be able to at least look at these things as the owner. Because if you don't know where every dollar is going, you're not able to then make the decisions to be able to get the money to where you really want it to be, which is ultimately that financial freedom. So this is how you can figure out if your books are a mess or if they're on the right track, and you could do some of your own self auditing of these general categories.

00;10;56;11 - 00;11;10;27

Unknown

And then from there, if you need more help, then there's people that can help you dive deeper, whether that's your bookkeeper or a fractional CFO of that's going to really take that deep dive with you to say, are we on the right track, wrong track? And are these books really clean? Is everything going to where it should be?

00;11;10;27 - 00;11;33;04

Unknown

And is it giving us an accurate picture of where we stand financially? Thanks for spending time with me today. If this episode gave you clarity or a new perspective, be sure to like, subscribe, and comment below if you're ready to apply. What we talked about today with real guidance and accountability, visit profit Recom to schedule a free discovery, call with us to create your path to financial clarity and freedom.