Money and decisions
Money, timing and the next commitment
Look past the attractive figure. Follow what is earned, what can be used and when the next promise comes due.
Start with the question the number is supposed to answer. Are you trying to understand the month’s result, make the next payment, choose a new commitment or take money out of the company? Those questions can lead you to different records and different dates.
The readings here follow a decision from its attractive headline into the work of carrying it. Some explain an unfamiliar term. Others put assumptions into an invented example so you can see where a conclusion comes from. The examples invite you to change the conditions and notice which part of the answer changes.
You can begin with the financial statements, follow a particular cash problem or examine an expansion. You do not need to read these pieces in order. If two figures appear to disagree, keep both visible until you understand what each includes.
Understand the figures
Give the number a job before using it to settle a decision.
What a millionaire or billionaire figure measures
A threshold tells you more when you know whose assets it counts, which debts it subtracts and when the values were measured.
Read onReading an illustrationRead the assumptions before the answer
The multiplication may be right while the conclusion asks more of it than the example supplied. Keep the conditions with the result.
Read onReading with your earsA listening note for a complicated agreement
Catch who pays whom before trying to remember every figure. Then check one complete payment at a time.
Read onReading the numbersRevenue, profit and cash flow answer different questions
Revenue records what the work earns. Profit asks what remains after costs. Cash flow follows the money that actually arrives and leaves. One job shows why the answers differ and why EBITDA is not a spending balance.
Read onThree amounts, three questionsAn asset record is not a sale offer
A sale can exceed the amount in the accounts and still need money to close. Name the figures before deciding what they mean.
Read onThe payment calendarWorking capital and the gap before you get paid
Money due from customers and money already in the bank can sit in the same working-capital calculation. Only one can pay a bill today.
Read onNumbers that need a calendarBreak-even is a point, not a cash forecast
A volume that covers the costs in a calculation does not establish when customers will pay or whether the business can reach that volume.
Read onThe operation behind the totalWhat a growth figure leaves out
Before asking how much a business grew, ask what the figure includes.
Read onRead the starting pointPercentage points or percentage change?
A move from 20 percent to 25 percent has two valid descriptions. Name the comparison before repeating the headline.
Read onThe payment and its fundingWho gains after a universal payment is funded?
A universal payment describes who receives it. The full proposal must also explain what changes to fund it and what remains after those changes.
Read onRead the layer, then the totalYour highest tax bracket is not the rate on every dollar
One schedule produces three useful rates. Keep the taxable amount, the next dollar and the increase separate.
Read onA statement and a later balanceCredit-card statement balance or current balance?
A credited payment can satisfy the minimum while leaving part of the closed cycle unpaid. Keep each amount beside its cutoff and condition.
Read onFollow the money through the dates
A source of value, an eventual receipt and a payment due now create different choices.
Why a valuable asset may not solve a cash shortage
An asset can be worth more than an urgent bill and still fail to pay it. The sale needs a buyer, enough proceeds after obligations, and a closing date that works.
Read onFinancing the beginningWhere a down payment comes from
The source of a down payment changes what the owner has committed, even when the purchase itself looks the same.
Read onCash and timingCash now or a lower cost later?
An option can cost less overall and still be unavailable when its bill arrives. That is a timing problem worth naming.
Read onA first-year worksheetThe first year before the forecast
A forecast can describe a worthwhile business and still leave its opening year underfunded. The missing period is often the one in which the owner has the fewest choices.
Read onMoney received and work promisedThe customer has paid. The work is still ahead.
An early payment can help fund an order. It also arrives with work to finish and whatever cancellation arrangement the parties have actually agreed.
Read onWhich account carries the season?Making owner pay regular can move the cash gap
A smooth personal receipt does not establish that the company generated the money that month. Decide where the earlier cash is meant to come from.
Read onThe claim amount and the repair paymentsWhy a replacement-cost claim can still leave a repair cash gap
A later payment can depend on the work being finished. Keep that condition beside the amount before counting it as repair funding.
Read onLook at the next step
The current average may leave out the hire, equipment or owner contribution the next addition requires.
Ambition at the edge of your circle of competence
Experience can travel. It does not arrive everywhere at once.
Read onBefore the business planDo you want the business?
You can enjoy working out how a business could succeed before deciding whether you want to own it. A better plan cannot make that decision for you.
Read onReading business experienceWhat success stories leave out
Ten stories can be true while the population behind them remains unknown.
Read onThe economics of growthWhat does the next customer actually cost?
An additional customer may fit the operation already in place. Or that customer may be the reason the company needs another team, route or piece of equipment.
Read onThe customer behind the feeWhat does finding the customer yourself cost?
A broker supplies demand the business would otherwise need to find. Compare the full routes before treating the fee as an available saving.
Read onThe offer behind the sales targetHow many extra sales does a discount need?
A lower price can bring in more sales revenue while leaving less after variable costs. Start with what the discount gives up on the purchases already expected.
Read onThe future customer in the forecastWhich future business would the gesture add?
A possible repeat customer is worth thinking about. The full future sales total is not the improvement an optional gesture would create.
Read onThe time between bookingsWhat a booking leaves you able to do next
The customer’s finish time is not necessarily the time your people and equipment become available again.
Read onOwnership after the last paymentWhat a paid-off machine still needs
The lender can be finished while the machine still needs attention. Follow the use, payment and work sequence before promising the next job.
Read onOwner-contribution inventoryWhat a company needs from its owner
Once the urgent bills are covered, the difficult question changes. A company can have several good uses for its resources, and its owner can have several good reasons to use them elsewhere.
Read onThe buyer and the operationThe same business can be a different purchase
Put the seller's contribution into each buyer's actual operation before carrying the reported result forward.
Read onThe whole financial positionSeveral assets can depend on the same thing
A business, an investment and a property can have different names while relying on the same visitors. Read the connections before counting the lines.
Read onAfter the first commitmentWhat another commitment would buy
What is gone, what is still owed and what can the next choice change?
Read onEvaluating an expansionThe mature forecast was not the first year.
Expansion decisions, ramp-up costs, debt payments and the demands a new venture puts on an existing company.
Read the guideAn improvement and its beneficiariesWho earns from the improvement?
More people arriving can matter greatly. The next question is how that change reaches the particular business or asset you hold.
Read onFollowing the cost that changesA cheaper supplier quote can still cost more
A $9 quote can cost more than a reported $10 unit. Compare the payments that end, the work that remains and the use of released capacity.
Read onRead what the agreement asks of you
Price, payment dates and responsibility matter together.
A lower price is not the only thing to negotiate
A useful negotiation starts by finding out what the proposed arrangement needs to accomplish for each party. The price is one part of that arrangement.
Read onThe price and the finished jobA fixed price and an hourly estimate
Two offers can cover the same work without putting the same limit on your bill. Establish what happens if the estimated hours change.
Read onThe bill and the commitmentMonthly bills can still commit you to a year
The payment interval tells you when money leaves. Read the agreement to find out when another choice is actually available.
Read onThe supplier’s side of your orderWhat your order asks the supplier to finance
Your delivery and payment dates become someone else’s materials, wages and inventory. A workable order has to fit both sides.
Read onBuying togetherWho carries a shared supplier order?
A supplier can have one firm order while the people behind it have made different commitments. Keep the purchase and the participant arrangements together.
Read onWhat the percentage applies toA share of revenue is different from a share of profit
Twenty percent can describe very different payments. Start with the amount it is twenty percent of.
Read onThe payment and its other recipientFollow the part of the payment you keep
A larger receipt can include money already assigned to another party. Follow the split before treating the bank balance as money for another commitment.
Read onContracts and dependenceWhat stands behind a guaranteed payment?
A minimum payment changes an arrangement. It does not remove the need to understand the person or business promising it.
Read onAssets and relationshipsGrowth did not always begin with buying the asset.
An existing client’s request introduced PCH to a different way of expanding. Owners had yachts. The company could organize the service around them. Brokers brought customers. The rights and obligations between those parties shaped what the business could earn.
Read the guideA discussion worksheetWho carries the agreement?
Follow an agreement through every role, including the people doing the work between the promises. Use the filled example, then make a table of your own.
Read onRead the ownership and financing terms
Find the money’s recipient, the rights received and the amount still due before comparing the headline figures.
Own the asset or earn by managing it?
The owner and the operator can both earn from an asset. They are paying for different positions.
Read onOwnership and operating reachWhich businesses are in the group?
Draw who owns each business separately from who supplies the assets, customers and work. Both pictures can be useful.
Read onThe form of compensationPaid in equity, with bills still due in cash
A valuable stake can be worth earning. It still needs a separate place from the money available to run the company.
Read onThe recipient of the investmentDoes an equity investment fund the company or its owner?
The same check can fund growth inside a company or put money in a founder’s account. The shares being bought decide which.
Read onThe relationship after the investmentWhat can another shareholder decide?
A company can receive its investment while a new decision still needs agreement. Follow the proposed rights through work the business will actually need to do.
Read onReading an offerWhat reaches you when a business sale closes?
A sale price describes an offer. The closing statement shows what becomes available and what is still waiting.
Read onOwnership and sale proceedsTwenty percent of the shares, which share of the proceeds?
The founder holds 80 percent on a converted basis. One supplied sale pool still leaves them only 20 percent of the available cash.
Read onTest how the purchase gets paid
The initial funding, recurring payments and final balance each need a source.
The payment fits. What does the whole loan cost?
A lower payment gives the monthly budget more room. The complete schedule shows what that room costs and how long the obligation lasts.
Read onBuying time as well as an assetSeller financing needs a repayment plan
The seller can make a purchase possible by waiting for payment. The buyer still has to use that time well.
Read onTwo limits on the same loanA valuable property may support a smaller loan
An asset’s value and its ability to support payments answer different lending questions.
Read onThe ratio and the commitmentBorrowing changes the return on your cash
A smaller upfront contribution can make a return percentage look much larger. Follow the debt payments and the rest of the funding too.
Read onWhen the business cannot payThe promise behind a personal guarantee
The owner can supply a promise without transferring cash today. That promise still belongs beside the owner's other commitments.
Read onTwo companies, one transferMoving money between companies does not create cash
A receipt can strengthen one company’s bank balance while leaving the combined amount exactly where it was.
Read onRead the financial record
Follow an unpaid invoice, a supplier balance or an inventory cost into the record where it belongs. Then reconcile profit with operating cash.
Why the bank statement and ledger show different balances
Two different balances can describe the same account. Explain each difference before treating either total as the answer.
Read onReading the numbersReceivables aging: what the unpaid total leaves out
Two businesses can each be owed $100,000 and show different estimated collectible balances. Follow the overdue groups before using the total.
Read onReading an inventory reportFIFO and weighted average: the cost of units sold
With identical goods bought at different prices, the cost rule changes what is assigned to sold units. It does not move stock or pay a bill.
Read onReading the numbersStatic and flexible budgets: what changed with the work?
More completed work can explain part of an overrun. Preserve the original plan, then compare spending at the activity actually achieved.
Read onReading a cash-flow statementFrom net income to operating cash: read the reconciliation
Four adjustments take $25,000 of modeled profit to $18,000 of operating cash. The receipts and payments show why.
Read onChallenge a calculated result
Keep the inputs beside the answer. Compare the average with possible outcomes, put cash on its dates and test assumptions together.
Expected value is not the most likely result
The average can be positive while a loss is more likely. Keep the possible results and their probabilities beside the calculation.
Read onReading the numbersNet present value: why the cash dates matter
A $200 cash surplus and a negative net present value can both be correct. Follow the dates and the discount rate behind them.
Read onReading a recovery dateWhat simple payback tells you and leaves out
Recovering the opening payment is a milestone. The receipts and obligations after it still belong to the project.
Read onReading the numbersNominal and real returns: what did the money gain?
A larger balance can buy less. Follow one price index through two original examples, with the dates and the dollar base kept visible.
Read onSensitivity and scenariosOne assumption at a time is not the whole downside
A price test leaves $500. A volume test leaves $200. Put their conditions together and the same model loses $200.
Read onThe value of informationWhat could a better answer be worth?
A perfect answer improves one decision by $180. The comparison begins with what you could choose without buying it.
Read onReading an interest quoteInterest rate or APY: what does the 5% include?
The rate used to calculate each interest credit differs from a yield already describing the full year. Keep the label with the number.
Read onThe cost that remainsClosing a loss-making line can reduce company profit
A $1,000 reported loss does not mean closing the line saves $1,000. In one supplied case, the company earns $5,000 less.
Read onRead alongside the book
Return to the full account.
Chapters 6, 9, 12 and 13 bring these questions into acquisitions, contracts, ownership and expansion. The chapter companion gives you a way to return to each case after following a particular question.
Open the chapter companion