Cash flow is king. Cash flow in combination with return on invested capital is really critical to consider. This is BYFIQ. Wealth and success come from understanding how finance works in business, and together we'll explore the most important topics to 10x your financial results. My hope is that we can work together soon. Please share and enjoy. Welcome to Cash Flow Trivia. Today I'm going to be your game show host. My name is Steve Coughran and we're about to have a lot of fun.

All right, it doesn't matter where you're at on the financial literacy spectrum. You may have zero skills Totally cool, welcome to the show. You may think you're a master at finance and if so, we're going to put some of your skills and knowledge to the test. No harm, no foul, doesn't matter where you're at. Like I said, let's just go ahead 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. And if you answer that correctly, then give yourself a gold star, a pat on the back or one of those weird awkward hugs where you're hugging yourself. Okay, all right. Nonetheless, it's cashflow. Cashflow is the most important thing you could have profit but still run into a lot of issues which we'll get into here in a little bit. All right, so cashflow is king. That's number one. I told you I'd give you an easy one. Let's go ahead and keep diving in deeper.

Question number two is EBITDA, which stands for earnings before interest, taxes, depreciation and amortization. It's just a nerdy way of saying profit. Is it the same thing as cashflow? I'll give you a few seconds to think here. Cash flow I'll give you a few seconds to think here. All right, if you said no, you are absolutely right.

So, although EBITDA is sometimes used as shorthand in valuation, for example in the multiples-based approach, sometimes investors or analysts will take EBITDA right. They'll take EBITDA as a dollar amount and then they'll multiply it by some type of factor in order to determine firm value. So, for example, a plumbing company may be valued at five times EBITDA and therefore, if they're making a million dollars in EBITDA, you multiply that by five and bam, you get a valuation of $5 million. But EBITDA is not the same thing as cashflow, and that's something really important to understand. And the reason why it's not, among others, is it doesn't account for invested capital. Now, invested capital has two parts, working capital and net property, plant and equipment, and since those two items aren't in EBITDA, it doesn't equal cashflow. All right, there's some other nuances there. I'm not going to get into the nitty gritty, nerdy stuff. I'm just going to keep it high level. That's all you need to know for right now.

All right, question number three in valuation, specifically the income approach, is a company worth the present value of its current cashflows or its future cashflows? In other words, do you take the cash flows of the company in a given time period in the current year and discount it back into today's dollars to determine value, or do you look at future cash flows? That's the question. All right, here's a second to think. If you answered future cash flows, you are correct. So in the income approach, if you're building a discounted cash flow model, also known as a DCF model, you're looking at the future cash flows of the business over a forecast period and you combine those cash flows with a continuing value to determine firm value. So it's all about future cash flows. And that's why strategy and finance are so important, because if you have a bad strategy in your business, guess what your future cash flows may be in jeopardy. All right, moving on, we got two more. It's part of this trivia game, all right.

Question number four if a company has $1 million in cash flow, are they creating value? All right. So if they're producing a million dollars in free cashflow, at the end of the day, after they pay all their bills, after they account for their invested capital, everything they're producing a million bucks. Are they creating value, yes or no? All right. If you said no, you are actually correct, because here's the deal. What if it required $2 million in hard cold cash as an investment in order to make that million dollars? Now, sure, we have to account for businesses being perpetual, meaning that they're going to have this ongoing life. Theoretically right. But in this example here, just to keep things really simple if a company puts in $2 million in cash, in this example here, just to keep things really simple if a company puts in $2 million in cash in a given year and they only produce $1 million in cashflow, they're destroying value, because you put 2 million in, you only got a million back and you're still a million dollars in the hole. That's why return on invested capital ROIC and I talk about this in other episodes is really important to consider in combination with free cash flow to determine value. Now, that was a little tricky there and a little bit more advanced. So if you got that right, you're on a good path, all right.

Last question, question number five if a company is profitable, if they're making profit right, net income, they have net income, they have profit Can they still go bankrupt? All right, a few seconds to think. Okay, if you answered yes, they could still go bankrupt. Ding, ding, ding, you just got yourself another gold star, because, check this out, 70% of companies that go bankrupt, they're actually profitable when they close their doors. Now, I've said this over and over again, so you're probably sick of hearing it if you are in my financial pro program or if you consume my other content, but it's worth mentioning here again because a lot of people don't understand this. Profit is not cashflow, never was, never will be. Profit doesn't pay the bills because, remember, there's invested capital and there's other stuff that you have to consider that is not captured in profit. So cashflow is king and, as we learned with question number four, cashflow in combination with return.

On brand new book I just published, it's free at Coltivarcom. Go to the website. You just pay for shipping and handling. So I don't go further in the hole and I'll ship you out a book, but you have to live in the continental US. If you want to just skip the website and you don't want to sign copy, you can access it on Amazon, and I've made it as cheap as possible for Kindle 99 cents right now is what it's at, and that's the lowest I could go and still have it published through Amazon, and there are also other versions that you can consume as well. All right, I hope you enjoyed this trivia game. Even if you got zero gold stars, you can give yourself a gold star because you're a winner and I'm your biggest fan. All right, have a great week and until next episode, take care. Give yourself a gold star because you're a winner and I'm your biggest fan. All right, have a great week and until next episode, take care of yourself. Cheers.