This is a YouTube video titled "Misleading metrics in terms of profit" containing a discussion between two speakers about accounting methods, specifically accrual versus cash basis accounting, and how misunderstandings in these can lead to misleading perceptions of business profit. The conversation includes practical examples and advice on financial literacy for business owners. The video was created on November 1, 2022.
Put that coffee down.
If I have a look at, like, say, the businesses that I've got, like, there's a lot of things that can throw you off. And so I'd say the first thing is, like, how is your accounting set up? Are you set up on an accruals or on a cash? Right. That's a big differentiator for a lot of businesses. I remember.
What does that mean?
What are those? So accruals is like, you look at revenue. So let's say you, you sign a contract for 150,000, that person's going to pay you in five lots of whatever. Right. 25 or whatever it may be. Then from there, like, you would attribute. If you're doing accruals, that would be $150,000 for the revenue.
Okay?
Right. But then from there, you would. Then the cash would come in. And so what you do is you have. You have a liability come into the business for 150,000, and then you have the asset come in, which is like the revenue. Right. So, and then what has to happen is that, like, the cash comes in as well. And then as that cash comes in next month, the liability goes down.
Okay.
And then from there, that money that's called, like, that's actual earned money, then goes into owner's equity.
Okay.
Right. In your balance sheet. So that's kind of how that works, which, like, a lot of people don't understand, especially in the space that I work in, because, like, I was having a chat with a guy a while ago, like, oh, man, like, ever since we. And this is a really misleading metric which, like, could sink the business. And I've seen the guy wearing a lot of things you probably shouldn't be wearing, I think, right. Like, each to their own driving things they shouldn't be driving. But they've gone, oh, man. Ever since we got this new finance company, our profits skyrocketed. I said, no, it hasn't. They go, no, it has. I said, no, it hasn't. I go, did you massively increase your pricing? Like, no. If anything, we make less on the. Because, like, the finance guarantees are cut. And I go, then how's your profit increased? Oh, oh, because we're taking it so much more cash. I was like, yeah, but, like, you still have the associated expenses. You're just taking the cash in all at once. You still have to attribute that.
Yeah.
You know, and even if you have cash basis accounting, which is just that the cash comes in, the cash comes out. Like, yes. You'll so show a higher profit but like then you just, you have to keep that like so like that's a super misleading metric because that person genuinely thinks that through collecting more money up front that their profit is increased. Which is impossible.
Yeah.
Because your associated costings have not changed. If anything, your profits gone down because now you're giving a chunk to the finance company. But because so much more cash is coming in on the front end, their friend, their return of ad spend is much higher. But it's because I'm not attributing that over, over the six months because the six month program.
That seems like a pretty obvious thing to me. It.
I agree, sir, but like that's just not like people aren't taught that. And so people are taught like they go to business coaches. Like when I wanted to learn finance, I didn't go to a business coach. I signed up to Harvard's online business school and I did the finance and accounting one on one course. I was like, oh, this has provided me with a good amount of information. So then I understood that and I was like, oh, sweet. I have a pretty good idea. I get to speak to my accountant. I got. I like, I use the course and went through our own books so I could have a better understanding. I was like, okay, now I have a good enough understanding of this to be able to talk to an accountant on a decent level.
Okay.
Not like I don't need to have CPA level knowledge, but working knowledge is important. But people go to business coaches and they just get taught sales and marketing bullshit.
Yeah.
So it's like they think that's running a business, which is a real problem.
Put that coffee down.
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