If you're running a business and if somebody knows how to do what you're doing and they can give you a five-year shortcut, why wouldn't you bring them on? That's crazy to me. This podcast, boosting your Financial IQ, is about business, financial literacy, strategies for profitability and the principles taught at byfiqcom. My hope is that you'll apply the lessons learned and that we can work together soon in my mastery program. Enjoy the show and don't forget to subscribe. If you're building a business, this one's for you.

Today, I want to talk about how smart CEOs think about money and what they focus on and what they ignore. Most business owners focus on revenue and profit, but the smartest CEOs think about money completely differently. So in this episode, I'll break down how high-level CEOs manage finances and what they prioritize and what they avoid to build scalable, cash-rich businesses. Here's why this matters. There's a difference between a financially savvy CEO and one who struggles, and the shift from an operator mindset to a strategic financial mindset is absolutely critical if you want to build a business that is resilient and that drives tremendous value for all involved. All right, so let's talk about first what smart CEOs focus on, and there's five, the big five that I want to talk about. Number one is free cashflow over revenue and profit. Now here's the deal Revenue alone is just a vanity metric and profit doesn't always mean success, right? So check this out.

I've worked with companies before that have profit and they may have, let's say, a half a million dollars in profit, but they have no cashflow and, trust me, that's a super painful situation to be in. Years ago, I was working with this doctor and he owned a dermatology practice and he came to me. He's like Steve, I have no cash. There's a problem because the IRS says I owe them all this money in taxes, but that can't be possible because I have no cash and I'm like, yeah, but you have profit. You just use your cash on CapEx and you have a tied up and working capital and he took distributions and therefore you don't have any cash, but you still owe these taxes. And guess what? He had to pull on his line of credit just to cover his tax bill. A terrible situation to be in.

So in your business you could have profit but not cashflow. I have another business. They have over $2 million caught up in working capital and it makes up a significant portion of their revenue. So if they continue to scale. They're going to just need more and more capital into the business until they fix this problem, right? So that's why revenue alone is just a vanity metric. I've had friends before come to me and they're like oh yeah, you know, I grew my business to, you know $10 million in revenue and I'm like that's great, but how much do you have in profit? And, more importantly, how much do you have in cashflow, right? So the key question to consider is how much cash is actually hitting your bank account after expenses, investments and debt payments. That's the key. How much cash do you actually have? And if you're struggling with cash, you're not alone. A lot of business owners struggle with cash and it can be hard to manage, it can be hard to compute, but it's not impossible.

I'll tell you you could go to coldfirecom as of the day of this recording and you could get the cashflow book that I just wrote. If you live in the continental US, you get it for free. Just cover the shipping. I'll cover the cost of the printing the book, and in the book I provide you with the strategies that you need in order to build a great company. Now, this offer may change in the future, so if you're listening to this one day and you can no longer get the book. Hey, it's a limited time thing, so take advantage of it right now. If you live outside these areas or you want other formats, you can get the Audible version now. You can get the Kindle version. I made it as cheap as possible, right? Because I care more about people learning about cashflow and building great businesses than making a little bit of money off a book or an audio book, right? So check that out if you're struggling.

But the number one point that I want to drive home is that free cashflow reigns over revenue and profit, and that's what smart CEOs focus on. Cashflow reigns over revenue and profit, and that's what smart CEOs focus on, right. So if you have a forecast in your company, great. If it's rolling, even better. If you go from revenue all the way down to free cashflow and you're projecting cashflow, that's the ultimate state to be in and that's what we do for all of our clients. We get them down to free cashflow and you should be paying attention to that as well in your business.

All right, numero dos from gringo white boy Steve, is return on invested capital ROIC over just profits. So you may have a company and it earns a hundred thousand dollars in profit. And then there's another business and they earn $200,000 in profit. And if I asked you which one would you rather own, you may be tempted to say, well, I'll own the company that has $200,000 in profit. But if I said, okay, but yeah, it's going to require a $10 million investment to get that, versus the company that's making $100,000 is only going to require a $10,000 investment, which one would you rather own? And this is where return on invested capital is important. So you have to look at profit, right. So profit's good to measure in addition to cashflow, but you have to look at profit over your invested capital. So the formula on return on invested capital is net operating profit after tax divided by invested capital. Invested capital has two components working capital and net property, plant and equipment. You can get both of these off your balance sheet, all right. So, like I said, you may have one company they have $10 million in profit but poor ROIC, and one with 3 million in profit but a high ROIC. I would take the one with a high ROIC because that business will generate returns that you could reinvest in the business and it'll scale, it'll create this flywheel. All right, so that's number two.

Number three smart CEOs. They focus on pricing and gross margins over just sales volume. So low margin businesses they struggle, even if they sell a lot and if they're stuck in this competitive space it's just a race to the bottom. So smart CEOs focus on strategy and positioning their companies in markets where they could get price premiums or at least competitive margins or above average margins. So it's all about positioning and it's asking how can we charge more and deliver more value? That's what smart CEOs ask. And there's the 1% rule. Increasing prices by 1% can have a massive impact on profitability and I did a study across the board, just generically across companies and industries, and what I found is that if you increase pricing by 1%, it has like a 12% impact on the bottom line and it's the best lever typically in business is pricing. So just remember the 1% rule and if you can focus on pricing and gross margin, like I said, which requires strategy and market focus and position and product market fit all these things your business will be so much more successful rather than just focusing on volume and not fixing these issues. All right.

Number four is liquidity and capital allocation over just expense cutting. So having cash on hand is super critical, because cash reigns the roost. If you have cash, you can reinvest it. You could deploy it for certain opportunities versus being cash strapped. So that's why I prefer liquidity and capital allocation over just cutting cost, which leads me into my second part Great CEOs. They allocate capital by reinvesting in growth if returns are strong. So if ROIC return on invested capital is strong, smart CEOs will double down on growth. They could also use capital to pay down debt right If interest rates are high. Or they can make distributions or reinvestments if they're generating excess cash right. So Warren Buffett he said, if a company has no good investment opportunities, the best thing to do is to return cash to investors. And smart CEOs know when it's best to pay down debt, when to reinvest and when to return money to investors. All right, number five this is the fifth thing of the big five.

Smart CEOs focus on long-term strategic investments over short-term gains. The smartest CEOs they don't just think about this quarter's profits, they think about three, five or 10 years ahead. So when you invest in people, brand and systems, instead of only chasing short term profitability by pursuing other gimmicks, you'll build a valuable, resilient company. So think about Amazon. They invested heavily in logistics and infrastructure and they lost a ton of money up front. They burnt through a lot of cash instead of maximizing short-term profits. And they could have maximized short-term profits in the beginning, right, they could have raised prices on their platform, but then they wouldn't be where they are today. Instead, they focused on the infrastructure, and now the company can leverage this capability where you could go on and you can order something in your pajamas with your thumb in like two seconds, right, which is amazing. So that's what smart CEOs do.

I'll just give you a recap free cashflow over revenue, and profit return on invested capital was number two over just profit margins. Number three, pricing and gross margins over sales volume. Number four, liquidity and capital allocation over just expense cutting. And number five, long-term strategic investments over short-term gains. And guess what? If you listen to other episodes of mine, these activities sound like strategic finance versus operating finance. These activities sound like strategic finance versus operating finance. Remember, operating finance is all about doing transactions and compliance and doing debits and credits and creating financial reports and budgets, which are all critical. But these activities that I just mentioned here are part of strategic finance. This is what we do at Coltivar and this is what really drives value and you can do the same exact thing in your business.

Right, here's part two, what smart CEOs ignore and what slows businesses down. So, number one chasing every new revenue stream. So not all revenue is good revenue. There's some revenue that is terrible revenue to pursue. So don't just chase revenue. Remember, chase cashflow. There's the danger of distraction, which happens when you expand into areas that dilute core profitability. So smart CEOs focus on high margin, scalable growth opportunities, without getting distracted by every new shiny object. There's so many CEOs who get bored in their career and they're like I need to find something new. Like I got a buddy and he does this and I'm like, yeah, but if you pivot, that's a huge strategic risk you're taking. So just keep doing more of what you're doing, make it better and then do new. All right, don't do the other way around. So that's number one.

Also, smart CEOs they ignore obsessing over taxes instead of growth. So avoiding taxes isn't a business strategy. So if you're trying to avoid taxes, you may be doing some illegal stuff. Don't do that. Instead, there's a benefit of paying some taxes, of showing some profitability, because if you constantly show zero profit in your business because you're like buying vehicles and taking advantage of section 179, depreciation, and you're writing it down, just so. You're like, yeah, I avoided taxes and I bought this new business truck. And look at me, I'm so smart. Well, guess what? Later on down the road, when you go to get a loan, what's the loan officer going to base their decision on when it comes to extending credit? Your tax returns? And then what are you going to do? Explain? You're like, well, I mean, but it's like it doesn't work that well. And guess what? Taxes are going to be a lot higher in the future most likely with rising debt, et cetera than they are right now. So I don't know why so many companies spend so much time obsessing over avoiding taxes. Now, sure, there are some tax strategies you could pursue to pay less taxes. I'm not saying that you should just overpay in taxes. I'm just saying that taxes isn't a business strategy. It's a side benefit of good financial planning.

The best CEOs focus on making more money rather than trying to find every tax loophole. So just go out there, grow your business, expand your business, make more profit, because there's a multiple on that profit that one day you'll realize if you ever sell your company. Number three smart CEOs ignore cutting costs instead of growing profitably. So cost cutting has its limitations, but scalable growth doesn't. So when I go into a business, you can only cut so much. Really, the upside is in the exponential growth that exists. So if you focus just on efficiency, you're only gonna get so efficient. And I'm working with a company right now and I'm constantly telling them like, drive greater revenue. You've optimized the business. You may be able to squeeze out a percent here or there, but the upside with revenue is tremendous. So focus on that. And then the last thing is trying to do everything themselves.

Smart CEOs delegate and focus on high-level decision-making, and this is really critical because if you don't, you're going to just get stuck in the weeds. But also I'll say this caveat that doesn't mean, as a CEO, you're excused from understanding what everybody is focused on and understanding exactly what the priorities are of people who report to you. Right, this is really critical. Being a CEO doesn't mean you don't do anything, you just delegate everything away. But then you have no clue what the KPIs are for your business, what your IARs are, your initiatives, actions, results. That's the framework we use at Coltivar to drive strategy. You have to know what these initiatives are, the actions, the results, the KPIs, the financials. You have to know all this stuff, but you could delegate so you could focus on high level decision-making.

And smart CEOs recognize the importance of hiring great finance teams, advisors and operators, because that's where they get the greatest leverage. If you're running a business, and if somebody knows how to do what you're doing and they can give you a five year shortcut, why wouldn't you bring them on? That's crazy to me. So, like, if your business is struggling with finance, like I work with companies and they're like when were you five years ago, steve? It's like, yeah, I know, I wish I would have found you five years ago because you'd be so much further ahead, but they just stay stuck year after year after year instead of just taking action. So there you have it. We work with a lot of smart CEOs at Coltivar and if you ever want to talk about how we might be able to help your business, you can always connect with us at coltivar. com. All right, that's what I have for you. I hope you have a great week and, until next episode, take care of yourself. Cheers.