Business Owners Need to Understand Financial Statements!

People who think about the infinite banking concept as a strategy, they just don't get it. It's a concept and has principles and in the hands of the policy owner, coached with a very capable professional and team aligned with that mindset, it truly transforms people's lives and it changes one from the lack and scarcity to one of abundance. And it can be for you if you take this concept seriously. You've got to take the power back in your hands, gain that knowledge, gain that skill, gain that experience so that this is how you can get further ahead, especially in the environment that we're in.

What the heck kind of advice are business owners even getting these days? Well, we're here with my good friend Henry Wong. We're going to unpack a recent example that came across his desk with an individual that he was able to help with a dental practice. We're going to talk through that and we're also going to talk about just the importance of understanding and unpacking your financial statements. Financial statements are often these mysterious documents with lots of numbers and lots of little footnotes that aren't always perfectly clear to relate what's really going on in the business. And so we're going to unpack that a little bit with Henry, keep an eye on some of the core elements we need to be aware of. And we might even use a sample business, you know, running some inventory through to, through suppliers etc, to kind of discuss that as we go. But let's, let's begin, Henry, with unpacking the situation that occurred with this gentleman who runs a dental practice. I think that's a great place for us to isolate the value of having the right team of professionals around your business operation as you begin to grow and scale.

Yeah, definitely. Thanks, Richard. This is going to be really exciting to go through. So the main thing I just want to first talk about is the medium of what we're going to go through and then we'll revisit some of the components for business owners as we go through it. So the important thing that business owners, especially incorporated ones, what they will have is financial statements. And the challenge is with this particular dentist that I've been working with related to the financial statements and what they receive, the type of guidance that they would get from the conversation is usually something related to what you could already receive and read from the face of it. And what I want to highlight today is diving into financial statements and first recognizing financial statements are basically a language. And not every financial professional, including those with designations and licenses, are not proficient in that language. And then once you have that language of that information that's in front of you, there's another component that I would layer into it, which is called the analysis of financial statements. And that's actually a skill. And skills take time to become proficient in. There's diversity in the skills and the differences vary from things like industry and size. And I'll use a couple of examples. So someone who's like a dentist or an IT consultant with financial statements who's bringing in $500,000 annually is going to encounter different challenges from same IT consultant or same dental professional with financial statements who's bringing in $3 million annually. And just a nuance of that difference includes things like the tax codes that are going to impact them and the level of wealth that they're at is also different. And of course now if I shift it to industries, the obvious financial statements, differences between a business model that is like a SaaS or software as a service business is going to be drastically different from those and also ones that are like an E commerce business. So what's really what we're going to dive into is kind of empowering you to improve your language as it relates to financial statements and at the same time know what to look for. And at the same time I kind of want to have everyone who's listening to this, especially if you're a business owner to go over the kind of relationship you have with your financial professional to get more out of that relationship.

It's important to find ways to. Again, everyone wants to get value out of a relationship, regardless of what relationship you have in your life. And for a lot of us where we keep and maintain people around us for the relationships and the value they provide, sometimes that value is camaraderie and friendship and you know, a number of other kind of intangible items. But in the space of, you know, financial professionals around you, we're really talking more about what are some of the tangible elements the intangibles do truly matter. I mean, you want to work with people you want to work with and you want to have a great working relationship relationship, but you also want to make sure that you're getting the value of the appropriate, let's call it advice, coaching, mentorship, understanding, and I really think awareness for a business owner to be able to make solid decisions as they look to grow, increase the business, hire staff, think about market adjustments, etc, they want to make sure they're surrounded by people who can have, they can have those conversations with and, and feel confidence in the level of conversations that they're having. And I think we'll kind of tie into some of that as we go through your story here.

Yeah. And you know, I just want to preface the overall framework. A business owner is usually no, is not a stranger for hard work and dedication and they're putting their blood, sweat and tears and energy into. And you know, people hear it as an a business but what I kind of want to shift the thought process around it is it's really an asset. You're, you're putting your equity, your sweat, blood and tears into this, your sacrifices. So you're ultimately building this asset and you're relying on this asset as part of your wealth building journey and to serve you once you transition out of this active, building, working accumulation phase of your life. So you're working on the business or you're working in the business no matter what, despite your best efforts. The first thing just to really highlight is there's a misalignment in terms of the mechanisms that exist today in the systems and what we have. And for example, like our progressive tax system, if you're not careful in how you position things for yourself, if you're using the incorrect components of the tax code, then you can end up paying more taxes than what you're not wanting to pay. And then there's also other components as the more income you earn, the more taxes you're paying. So how can you better position your asset and, and your efforts so that you're properly taking care of the financial mechanisms in society? And then there's other components like profiteering from the commercial banks and also lastly just pretty much other financial predators. So just kind of want to place that kind of on the landscape for everyone to listen to on that and how I'm coming from the approach, I.

Think it's funny that it's called progressive tax system. Like it sounds such, like it's such a modern and popular way of looking at things. You know the reality, it's, it's that the tax you pay progressively increases as you raise your income. But it, it's when you say progressive tax like it sounds like it's supposed to be good for you, you know, you know, but it's not.

Yeah, for sure. And, but it is progressive because the more you make, the more they take. So it definitely works from that vantage point. Now, now that you kind of understand the context of where I'm coming from, the next thing is now saying, well, as your business and as you are building this asset and the wealth part of your Components to wealth to it. You're going to surround yourself with a professional or a team of professionals. And the point I want to highlight here is that, you know, I'm just going to use my own experience and being a financial professional for over 20, 20 years and a variety of experience and it's not doing the same thing. In the 20 to 20 plus years I had differing roles and everything that I built my career around and the skills that I've attained towards it. And so I'm just going to use this example related to big companies. So I worked with a big company, I worked for several big companies too. And there's different layers to financial professionals and I'll just kind of unpack those layers. And the reason why I'm using a big company is because a big company will demonstrate that they have the ability to have the resources. And then you're going to look at, I don't want you to look at it to think that this isn't something you're able to do because it's fully available. It's just how you're able to build the relationship with the professional you have and is it with the right relationship of that professional. So let me use this example here. On a big company there is an executive role, let's say, let's. And it's usually called a chief financial officer or cfo. And their role to the business is to be the strategic right hand partner to the CEO. So if you imagine yourself as the CEO, do you have that right hand next to you? And usually now in their job is to support capital raising or structure the corporations. And you know, in my past career when I was a cfo, I've dealt with mergers and acquisitions, raising debt capital from banks or public or private share insurance or even private equity. So they are usually focused on raising the value of the business and building out that financial pillar of the business. Then you have the second component which is the management or director role. And that's where there's financial planning and analysis. And this particular role builds what's called financial models for the business. And these models usually position where the company is today and where the company wants to be, which, you know, companies will usually set up a mission or have a vivid vision or something along those lines. Well, you've got to have a model of an architecture and how you would actually achieve that financially. And this includes things like budgets, forecasts, projects, projections and assumptions. So that's kind of that particular role is to help move the business or the executives to help lead the company to that vision or that mission. And then there's the controller and this controller usually captures the actual. So what has revenues actually been for the month compared to what was the budget? And then they're going to recognize gaps and weaknesses in the mechanics of the business and from there they're going to identify process breakdowns or components related to, let's say, training of staff, team management, where there's gaps in those processes to make sure that it isn't leakages that are preventing the businesses from achieving that budget and projection. And then the last role is related to what's kind of like an accountant or a bookkeeper who compiles and, sorry, who compiles the financial data into useful formats like the financial statements. So if you're kind of looking at it from this vantage point, a very well resourced big company is looking at all of these dimensions to move their companies to that. So even though, despite where your business journey is as a business owner, it shouldn't mean that you don't have this capability in place, whether it's with a person, but it does. But what can be supplemented with the right relationship or with the right education and knowledge. And that's kind of where I wanted to kind of position that for everyone today.

And I just want to ask a question about that Henry, because you know, I appreciate how you kind of went through the various common roles that we find in an organization structure. The people that are operating to some varying degree around the accounting components of a business. Okay. You know, most of the things you identified were fundamentally about the transaction. So whether it's projections, transactions, review, confirm, actuals, validation and then financial statements, it's kind of like, hey, here's what the future looks like. Here's what happened. Here's us confirming and verifying everything that happened. Here's us handing it over to the accountant who prepares it and tells us what happened while. But we don't get it for six to eight months to find out what happened. So that's kind of like the timeline of some of those things working their way through and, and in these various roles and just, you know, you know about this more than I would. It seems to me that it's common for people with a, an accounting background or a degree in that type of environment. Like you don't really go get a degree for financial controller, but you probably, you might have an accounting degree or background and then you'd find yourself in a position of a financial controller. Would that be a fair assessment?

Yeah. So the designation is just the designation there's requirements in terms of experience. You have to get to have the designation and allow it to be put next to your name. However, the designation doesn't define the skills that have been architected and experienced. So someone who is, as an example, a CPACA like I am, they may not have what's called financial planning and analysis experience because usually they'll find their roles in the controller role. And so how so part of that journey as this professional's building experience. These are some of the things where even if the one that you're working with, you might want to even ask tell me a little bit about your background and how you built your experience. Because when you are hiring an employee, you're going through an interview process, but somehow the designation supersedes the asking of your experience to see if you guys are actually a good fit or alignment. And it's more focused on, you know, I need this problem solved and then I'm just going to pay you for it and you're going to solve this tax filing problem that I have. And that's kind of the first part of the challenge that's there too.

There's assumptions that are made and we all know what they say about assuming things. But once a designation exists, we can assume a bunch of things. And, you know, if anyone's ever, you know, anyone's ever looked at the stack of content that exists for the Canadian tax code or I'm sure the IRS tax code, by the way, I don't want to, don't send it to me. Like, I don't actually want to look at it. But, you know, we're talking about volumes of content and information and constant changes. Like it's not reasonable for a human being to understand all those dynamics. And so what I think you're really trying, here's what I'm really think that you're trying to identify and clarify for our listeners. There's a difference between a designation and a capability that you know and, and a knowledge base. And then there's a difference between experience and fundamentally there's accounting professionals. Not to pick on accounting professionals. Again, we really appreciate and love the ones that we work with, but that there's tax preparers and then there's tax strategists. So there's people who actually work with business owners and professionals to say, okay, look, based on what your projections are, based on what you're looking at doing, based on how you're hiring and doing, based on the current landscape in the environment, what's going on the nation and where we think taxes are going to go. Here's some things we should implement this year going forward so that we can be preventative and proactive versus hey, your taxes were prepared. Here's the tax bill, which is very reactive, right. And I find in, you know, we, we meet with people all over the map and a lot of the business owners, I, you know, a lot of, you know, mom and pop shops, people who, maybe that's a one, two, three person type of a corporation. They, they make great revenue, they provide a great service, they're adding value into the world and the economy. But, you know, because they're a small, you know, environment, they don't necessarily need all that extra, potentially advice and strategy, but they also don't go seeking it properly. So they end up with a tax bill that was prepared and they're dealing with it three, six, eight months later. And meanwhile an entire year has gone by where they've lacked any planning and strategy to prevent some of the things that happened in the previous year from happening again. So we get in this like repeat loop. That's what I see happening. Is that something that's been common for you when you meet people.

So 100%. So the first, and to go to your comment on even just if you take a step back and look at the process of how most business owners will operate that aren't at the big company size scale with those resources is, it's like you're saying it's reactive and the information that they get is actually no longer very useful. However. So when I say not useful, you've gone through the year, and I'll use a calendar year of December 31st as an example, you've gone through the year and you've had a whole bunch of financial transactions that have been compiled and put together into financial statements. And then you actually file your tax return in June of the following year. So you actually have a full six months usually if you follow their process, to not really understand what actually happened in the 12 months past. So you're always pushing forward, but you actually never really realized where there were any gaps or deficiencies. So the information that was already prepared for you kind of has lost its relevance and usefulness to you. However, if under, you know, and this takes skills and experience, if you can actually look on how to unpack it, and that's what we're going to go through some of that today, you can actually identify specific chronic issues within the business that you can still solve despite the loss of timely relevance to the financial information. So that's one thing. So again, that's kind of filling in the role of a controller. So that task still exists. As a business owner, you may not have the resources to hire a controller specifically for it, but that task of going through it is one in terms of the value. The second is actually even having a budget in place to say, you know, based on how your business operates, the mechanics behind it, you can't just say, I'm going to make a million dollars next year. But if you don't have the fundamental building blocks and the components to get there, you can build a budget and say, okay, it's a million dollars annually. So I'm going to break that down linearly to be 250 per quarter. That may not even be the way that your business operates. Like a farming operation is very seasonal based on their particular seed and harvest cycle. So you can even model things in that way. And this is kind of, again, it's the task that would be adding a lot of value to you to have that kind of modeling behavior and thinking about that. So, you know, when things are deviating from the norm.

Now, I think that that's a perfect tie in to kind of tee up the example that you were sharing with me before. We hit the record button around this circumstance for a client with a dental practice. And so you encountered an environment where someone sought some of your counseling, your advice about implementing the concept of becoming your own banker, which is what we primarily focus on here. But through that conversation, you were able to identify some, we'll call it interesting gaps. You know, a lot of this is a recognition as we continually do this work and we're meeting people all over the nation. We're doing it for, you know, again, our team members across the board, we're in constant trainings with one another, and we're finding these are common and consistent gaps that we see that appear at least on the surface and often when you dig below the surface, to not be identified or recognized and then discussed with the business owner themselves. And we're often being told by business owners and professionals, hey, look, this is the first time I'm hearing this. Why hasn't so and so told me, why hasn't this individual tell me how, how are you the first person to identify this? And for me, I have to say, well, you know what? Look, I'm not a tax professional. I don't dole out or provide any tax advice. I, I work with some great ones and I, and I refer and defer those type of conversations. But I say look, what I am really good at is asking good questions and trying to figure out getting to the bottom of things. We need to play detective when it comes to your financial life so we can find out where's the money going. Once we know where it's going, we say, well, how much more can we keep? How much of what's going out can we keep with you where it belongs? And that's really what our focus is. So this is the type of conversation that you had with this dental client here. So walk us through what transpired, Henry.

Yeah, and you know, I want to also just bring to the awareness of the business owner, as you're listening to it is. So there's the dentist, sorry, there's people where there's tax compilers and tax, potentially tax strategists and tax advisory and tax planning and estate planning. So if you kind of think about it very logically, where is all of your money going? A significant portion of that is going to taxes. So wouldn't it make sense for you to have a really value added tax professional on the side that helps you with that big expense? And then the, the dimension now that I'm adding is also the value creation component is, well, how are you best using your money? Are you getting your rate of return on the money that you're putting into it? This is why you need to identify the gaps in your business. Is there leakages happening? And again, so I'll use another example there, but on specifically the kind of experience this dentist was having with his current professional. And when I was probing through, asking him questions, he was very surprised. And I'll kind of share the experience of what it is. So let me set a bit of the context of this, this dentist. And so he has 40 years of experience, but based on how his, how he was. And he built that 40 years of experience, he was working with other dental partners. And then beginning 2020, he started his own practice on his own. But now we all remember what happened in 2020 with COVID lockdowns. And now with the nature of the fear around Covid and just starting, if anybody actually starts a dental practice, they know how much investment they have to put into equipment. And then now you're layering in other safety measures at the time. So anyone starting that business knows how challenging that is. So that's four years ago or close to five years now. Four years ago. And if we fast forward it to today, one of the requirements I ask for when I'm meeting with someone, so I would ask Mr. Dentist here can I see your financial statements? And I go through the financial statements and I can already see right from the get go now when you look at financial statements, and we're going to go through this together today too, is something called retained earnings. Now there's a gross misunderstanding on the definition of what retained earnings is, but I'm not going to address that today. But I want to dive into his specific situation. There's accumulated deficits. So that means the dentist was losing money every single year. And if you're losing money every single year, you can kind of relate that to the government losing money every single year. And those deficits. So there's an accumulation of those deficits. And if you keep the business as a contained unit, like a legal structure, how is the expenses which are exceeding the money coming in being paid? There's only two ways to pay for it, which is debt and cash from somewhere else. So where is this money funding those deficits? And so this dentist had four years of accumulated deficits and he's working with a professional. I'm asking him, what kind of conversations are you having with your professional? Do you have an annual review meeting after he's prepared these financial statements for you? And he's like, oh, you know, the conversation that we have is really just focused on what I could already read on the financial statements. And so, you know, as I dig deeper, there's questions that I can ask. I'm like, okay, so how are you funding these deficits? He's like, oh, I've actually borrowed money to fund it. And then I ask him, so if you're borrowing money, are you getting interest deductibility for it? He's like, no. And so there's all these questions that didn't fully get flushed out. And these are very simple. These are just kind of the surface ones before I really dug into it. So just kind of wanted to highlight the component of getting the right relationship partner in your corner as it relates to the business. So after four years, I would have thought as a professional, because I care about my clients, how can I get them out of the situation? Why are you having challenges with the deficit? So these are some of those examples of really good coaching that comes along.

So Henry, you met with this IT professional, having some things that you're identifying some concerns. This led to eventually having a meeting, a joint meeting, a three way meeting between the client, yourself and their, their, their financial professional that they had been working with up to that point to try to see if you could help steer things along, help provide Some insights so that they could be moving forward and everything would just be getting that much better for their situation. But you sounds like you ran into some resistance. So what exactly transpired?

Yeah, so this was a separate situation with an IT consultant who really loved the concept of what we do and how we're improving people's lives and wanted to embrace the concept of becoming your own banker. So we actually met four years ago now just to kind of give a bit of background four years ago, but implemented the process two years ago. So basically a two year kind of a gap from that vantage point. But what I wanted to share is as part of again, the process that I would go through interviewing this client of mine now I kind of identified things like, well, he's structured right now as a sole proprietor and based on everything that I'm seeing in our conversation, he would have actually financially benefited further incorporated as a professional. And so this from the experience, there's a gap here and I'm trying to understand why. So I'm asking the questions. And you know, we go through the process and he wants to implement the, you know, implement the concept and we're going through that. But he's like, Henry, you're making some very drastic changes for me and I. And some of it is especially related to my financial professional who's going to need to work with us together. So he wanted to run this through his account, his accountant, who he's been with for over 20 years. And so he's arranged a meeting with us and it includes his wife because his wife is also part of this whole process that we're going through. And you wouldn't believe in the first 10 minutes of our meeting, and I remember this very, very vividly, this conversation, the first thing that comes out of his accountant's mouth was to start with, Mr. Client, I have a number of concerns with the direction you are headed. And he started to bash him in front of him, in front of his wife and me. And by the way, this is the first time I'm meeting someone. So this is what I would call a great first impression. I'd say not only was he putting him down, he was unfortunately, and this is for me commonly very frustrating and inappropriate because this professional doesn't have a license to for life insurance and he's expressing an opinion on a regulated product and he's suggesting par whole life insurance is a bad idea. And this is from my vantage point where I could tell he doesn't have the knowledge or experience on how to account for a par. Whole Life insurance product, a permanent insurance policy on the financial statements, that's one. And then the second is actually how to address it for tax filing for the cra. So even much, so much to say that, you know, things like, and the conversation included things like he was incapable, the Mr. Klein was incapable of transitioning from being a sole proprietor to being a corporate business owner. And you know, if you're looking at the vantage point of where he is, his positioning as a trusted expert that this client has built 20 years of a relationship with, the only thing I can really say is it's really, really unfortunate that type of relationship exists and transpires between them. The first thing that happened after the meeting in our debrief conversation is, well, he asked me do I have someone I could connect him with to help him with his financial affairs. That's one thing. The second thing is, you know, do you know, I just kind of wanted to share, do you know where he was at in. When I first found him, how much revenues he was earning? He was earning about 150,000 a year. And then with respect to that 150,000, he was paying 15,000 to this professional for services that include the tax filing on his sole proprietorship and his personal filing between him and his wife. So that, you know, today, 2 year.

10% of his gross income was going towards the tax professional.

Correct. And so he's still paying the same amount in terms of professional services fees to his new professional that I've introduced him to. But do you know what's most important that has shifted for him in the two years of us working together? And I just wanted to share where he is at now after two years. So he's producing 300,000 in revenue, which is basically a very powerful transformation. In two years he's doubled his revenue. And now if you think about this component here, which is imagine first, if he never shifted his business structure from being a sole proprietor to an incorporated business owner, half of that would have been lost to taxes. And then it's even harder to quantify the kind of impact the relationship negativity had on him. And so just kind of wanted to show why it's important to have a really surround yourself with a good relationship and someone with good skills and capabilities willing to ask questions to help you get further ahead as you're building your wealth journey.

And I think you had identified to me when we were kind of talking about the preamble for setting up this discussion, Henry, you had identified that the previous tax preparer that was working with the client, they were indicating something about how it was impossible for them to even transition the sole proprietorship that he was running to be able to do it, incorporate it. There was some rationale that didn't really make a lot of sense. So, so what was that all about and how was that affecting. Affecting the client's ability to recognize what was possible in his own life?

I mean, most of the concerns this professional was raising and in front of us, so I called it bashing. But to me, it is bashing because it was saying, I have concerns on how he would capture his expenses. I have concerns on whether he could put it together into a system. I have concerns on a whole bunch of other stuff. So it was basically putting him down on his lack of ability to do it. And, you know, solutions like that could easily be solved. As an example, if he technically did not have that ability, he can hire an assistant to help him, you know, for a far, you know, far lesser fee, in my opinion. I mean, as an example, to help put it together, there's plenty of apps and softwares that you can take pictures of your receipts and then have it flushed into your accounting system. So there's a whole bunch of other solutions that exist. And the merit behind the professional putting now my client down was definitely unjustified.

Yeah, it's interesting. And, and so, you know, we're. We're a couple of years later, obviously revenues have increased, which is great. And just thinking about this, you know, what was the age of this gentleman when they, you know, kind of first came in contact with him?

Roughly in his 40s. So in his early 40s.

Got it. All right, so if we think about, you know, him being in business now for another 20, 25 years, and now with the potential of some tax savings that he can implement through the restructuring and so on, I mean, the impact of that financially, you know, over that period of time could be quite drastic. It's not a little deal. It's a. It's all. It's a big deal. Coupled with the fact that he's effectively removed a negative influence from his life. I mean, I think emotionally, like, if you, if you're a business owner and you're excited, you have ideas and you hear something and you want to see if you can implement it, and then you approach one of your financial professionals, see if it's feasible, and if every single time that you're doing that, you're just being shut down and giving all the reasons why it can't happen, and to some degree, maybe there's that's warranted. But instead it's like, well, you know what, I don't know if that would work for you necessarily. Really cool idea. Walk me through why you want to do that. And it's like, so. So there's a difference between having a discussion like that that's open ended and has some progressive forward view to it versus, meh, no, can't do it. Sorry. Don't ask me that ever again. Like, what do you want? Do you want to go to jail? Or you get whatever. You get one of these kind of, you know, canned responses because they don't want to do any additional work for you. And I've had those experiences both personally and I've seen it happen directly with the clients that I serve.

Absolutely. I mean, just to kind of connect the point that this financial professional was in his 70s and I would be, you know, wondering would I want to take financial advice from someone that's in their 70s, still working? Is that a different in the. I mean, as long as he loves what he's doing. But I don't know if the alignment really fits there just from a perception standpoint. And then also just functionally for Mr. Client here, that 20 years of removal of negativity, the transformation of doubling his revenue, I mean, there's still, I mean his revenue is still growing, by the way, but just using the fixated point of an extra 150 for 20 years, that's 3 million of additional income this person is missing out on. And the part that that's really important is to really evaluate the relationships that you have. Even look at the point of entry. How did you enter into this relationship? Did you enter into this relationship by looking for the cheapest and cheerfulest budget as possible? Because if you align, if you pay a valuable fee to the professionals that you're working with, they will, if they provide you value, it's going to be so much more weight in gold. And you know, fortunately for me and Mr. Client, I don't actually charge him for my time, but he respects it. That's really what's important.

Yeah, I think another component of that is just thinking about, you know, the, the many years I've spent networking in different business groups and clubs, environments and coaching groups and so on. You know, a lot of times people, when they get started in business and they don't really know what they're doing and it's, it's a foray into something unknown and they're, they're, you know, bootstrapping it, as it were, or what have you. They're not sure if it's going to be successful. They're taking on a lot of risk. You're trying to do things with, you know, low cost alternatives, et cetera, working long hours, like a lot of these kind of common things that we hear about the entrepreneurial journey. And often they end up getting a recommendation. It's a friend or a buddy or an uncle or you know, their neighbor who's, you know, going to help them initially with some bookkeeping work or some basic accounting work or what have you. And, and then they develop a loyalty to that individual, which is great. I mean loyalty is extremely valuable. I a hundred percent recognize that. And, and to some degree it can be difficult to disconnect from those relationships. That person was able to help you when you needed them, et cetera. But there is also a recognition that at some point your business may outgrow the capabilities of that individual. And it's nothing, it's no slight against them. It's not to say that they weren't there to help and support you, but are they going to help you level up and get to the next stage or are they going to hinder that process? And, and sometimes it becomes difficult. We have, you know, we can develop blinders on our eyes to some degree on being able to see that as the entrepreneur because of the relationship that we do have because of the loyalty and stuff. And I would never encourage anyone to, to eliminate that relationship or the loyalty. But it is important to say, look, we need to grow, we need to scale. Hey, are you able to level up? Or can you, can we bring in someone that has the capability to take where you've gotten us and bring us to the new, the new level? And I think that pragmatically a business owner needs to start considering that and being, just being aware. Like it's, it's okay. It's your business, it's your baby, it's your growth, it's your family that you're supporting. It's the many people that work for you, the employees and their families. If you need to make a change, you have to make that change. And there's many reasons why you need to consider it.

Yeah, very valid. And you know, I just want to insert for me, merit is very, very important. So for me, I'm always upskilling. I'm getting coaching all the time, surrounding myself with really great people because I want to be at a phase where as I get to get the privilege of working with our clients and growing them. Well, I've Got to keep up with their growth or being at a different stage that there are so that I can give, still continuously give them value and so that they obviously would stick around with me because there's a, there's value out of it. I don't want to be in a position where you're dragging me along and that doesn't really help. So this just something that I wanted to share in terms of everyone's, if everyone wants to grow and if you are aligned with someone who's growing with, with you, then the relationship really is very synergistic.

Yeah, makes it makes a ton of sense. Now what were some of the other, you know, I mean you kind of give us a couple of use case examples here, Henry, but what are some of the other common things that you tend to find, or we'll call them gaps that you see in the meetings that you have with an individual Once you get a chance to unpack the financial statements, go through a bit of a questioning process. What would you say are some of the top gaps that you tend to recognize? Obviously it's very varied. Everyone has different business structures. But what are things that come up for you just off the top of your head that you tend to see happening for the business owners that you serve?

Yeah, and so what I want to focus on is actually empowering the language around financial statements. And I'll go through just an example of them and then just kind of what to see and interpret. Again, it's not going to be applied unilaterally, but the biggest gap is, I mean there's, there's layers to this, which is, there's financial statements, which is what you're going to see and financials and analysis at that level. And then there's operational financial analysis, which is going to be specific to your business model, specific to your processes, specific to your actions and what you would take related to that. So I will give some examples using a traditional business model. And you know, I'm kind of deriving the information from client of mine, but nonetheless it's to illustrate, kind of using the context of the information here, how you're looking at the financial statements as a business owner from your lens of view. And then, then you can kind of kind of move forward from that. So the first thing I just kind of want to set out is financial statements. There's officially four pages, let's say of them. There's the balance sheet, there's the income statement or statement of profit and loss, there's a cash flow statement, and then there's a statement of equity. Now in the, let's just call it in the business owner, small business owner world, depending on what your kind of services you're getting, they usually only give you two of those financial statements, which is the balance sheet and the income statement. And unfortunately, and I'm going to share this in our example today, that there's a lot of information you can get from the cash flow statement that is unfortunately missed. And I wanted to use that as some teaching points for the listeners to go through. So I want to first share my screen and show an example of a financial statement and actually go through the interpretation of it just to again set the stage of understanding. So what you see in front of you is a balance sheet. And on this balance sheet, the first thing to really understand at a high level on a surface standpoint is a balance sheet you're going to see is as at December 31, which is basically taking a snapshot of the corporation at that point in time. So if you have your professional prepare financial statements for you and a balance sheet as of January 31, February 28, those are going to show you snapshots of the business at that point in time. And the way that most people may connect and resonate with is the balance sheet is essentially a present version of the net worth of the business. So personally, you don't have a net worth statement that you're running every single day or even every year. But the benefit of actually a corporation is you have a financial statement and you actually can interpret what your business's net worth is at this point in time. Now the only drawback, and this is all in the sphere of the accounting world and it gets really confusing. So I'm not going to dive into it. But the elements in what you have, there's a discrepancy. It's the cost in what you pay for things and it's not the fair market value in what it is worth. So I'll use an example of where there's a discrepancy. Property, plant and equipment, you could have paid $481,000 for it. You may be using depreciation mechanisms or CCA to bring down the value. So you could have bought the equipment for 500,000 and the, the cost of what that is is 481. But if you were to sell this equipment, then the equipment, if you actually sold it for what it's worth, and let's say it is worth quite a lot, it could be 1 million. Well, the financial statements are not going to write down $1 million because that's just not how they're structured. So there's a bit of a discrepancy when you're interpreting the financial statements. But that doesn't take away from actually still what you can see and the information you can glean on. So when you're looking at this $1 million in fixed assets, then you're. That's kind of one thing to take into perspective that there's a difference from there. The other component to also look at as it relates to the financial statements and what I can tell, and I'm using just experience and how I would cut through the information is if I look at the property planning equipment, usually the structure of financing, you're not going to pay cash for it. Most of the behavioral attributes is they're going to go through with a financial intermediary like a bank to get a loan to pay for this financial, sorry, this property plan and equipment. So I can see right here, oh well, they have some long term debt. It's no different than you having a personal residence home and it's a long term asset for you compared to you're going to. You paid for 20% of it as a down payment. 80% of it is serviced through a mortgage or a long term loan. The financial statements reveal the exact same thing and it shows you all of the liabilities related to the business from a long term standpoint. So just kind of wanted to use that as an example to paint the picture of understanding the financial statements from a balance sheet standpoint. And I'm also going to place into position that the balance sheet is very, very important. It's your, the business's net worth minus the fair market value, adjustments between cost and fair market value. And unfortunately most financial professionals ignore the balance sheet. So this is very, very important to just capture to, for you to recognize. Related to, to me, balance sheet is actually a very important statement.

Now one key thing I noticed about the balance sheet example that you just showed Henry, nowhere on it in the asset column was the business owner listed.

Absolutely.

So. So the most important component of the business, the person that is the visionary that runs the business, started the business, etc. If they're not listed on the, on the. I was in an event here recently, I believe this was maybe last week we did a, we did a webinar for business owners and we asked a question for people. What would happen to all the business owners on the call if all of a sudden you were no longer available to run the business? What would happen to the business. And the responses that came out in the chat box were consistent across the board, that the business would go to zero, it'd be worthless, it would die, it would drift off, it would become less valuable. It was a whole host of these common elements. Now, that's not the case for every business, but certainly it is the case for many of them. And in that scenario, what you just showed us, nowhere in the asset column was the business owner listed. Now, how you would identify that is if you had cash surrender value of insurance, and there was a value appropriated for that. And so we can then infer and investigate with some questions, who's that insurance on? And is that the business owner?

Absolutely. And you know, part of this is just maybe stemming from the lack of training. I mean, I have trained CPAs to get credentialed, to get their designation for over 12 years or so. And in that training process, I know in the curriculum, and I've been involved in that curriculum, there isn't a discussion on how do you account for and treat permanent life insurance? And the way that it needs to show up on the. Is to show up on the balance sheet as an asset. And unfortunately, because of that gap in knowledge, this is my opinion that when they see premiums coming out from a whole, a whole life insurance policy as an example, they think of it as an expense, but it's actually technically an asset on the balance sheet and it's represented. If the life insured is the business owner, which is the merits and the process that we go through to properly place it, the business owner is now being recognized on the balance sheet. This is, this is a, as an asset. This is a legitimate accounting entry that needs to show up on the balance sheet, not an expense out of the business. So, I mean, I'll go through the income statement next, but your, your property plan and equipment is on the asset is on the asset list. Your accounts receivable, which I'll talk about next later, is on the balance sheet. Your cash is on the balance sheet. But why is the business owner, who is just as vital to the business, who is an asset to the business, not on the balance sheet? Still, you know, the accounting is correct, but the thought process behind why it's not there is unfortunate, and this is a disservice to the business owner when they're not recognized on that balance sheet. So the next connection I want to lay out is the income statement. And this is what most people spend their attention on. And I kind of want to maybe clarify some concepts around the income statement. So what you will see is as an example for the year of 2023, this business, Canadian Hydraulics Inc. Has captured a set of activities that summarize the total of revenue of $3.4 million. So the gap that I want to highlight is amortization is actually not money going out of the business. This is an accounting method to equalize the cash flow. For when you buy equipment, a lot of money goes out, but it doesn't represent actually the value of the equipment to the business. And they're spreading. It's a methodology to spread that cost out over time. So when most business owners, or sorry, when most financial professionals may be communicating to you as a business owner, like, oh, you brought in 143, but you as a business, you're in the business, you know very, very well. As an example, this amortization is non cash on. And you actually brought in maybe even $200,000 as an example, $200,000. But that's because the issue with just looking at net income, you can get things clouded with the representation of how it's being presented. So I just want to highlight that just jumping straight to the net income number is not a good basis to form formulate. Here's how much your business actually made. You actually need to look at the cash standpoint because that's really how most business owners operate. How much cash you actually have in the bank. For us, we talk about cash value is much more important than cash. But we're kind of saying from a standard business standpoint, this is what I.

Wanted to highlight and I might be jumping ahead here, but you had, you know, sales and salary and wages on. There was 442,000, roughly speaking. It's not identifying how many people are on the payroll. We don't know what percentage or component of that is what was paid to the business owner, maybe the business owner's spouse or whatever. Directly that was capital that the business generated that still obtained somehow the direct benefit to the business owner themselves. So that's another thing that would probably be under some consideration there just to be, you know, get some clarity on. And something else that comes up for me that I just thought it would be important to just identify is like there is a line here for insurance. It shows $28,556. But that insurance that we're talking about is not the same as insurance for, as an example, a life insurance policy. Often we'll have questions from people or they'll want or even perhaps their financial professional might indicate that they are going to attempt to write off as an expense the insurance premiums. And that is a big fat no. No. And perhaps you can add some context on that, Henry, as to why.

Yeah, I mean again, this comes with the right training and the mechanics and the details of this specialized asset, which is a permanent life insurance policy. And you're treating the premiums as an expense and it's shown as an expense as you're filing your taxes. You can expect a nice phone call from CRA and a letter in the mail to justify this expense because specifically it's not a deductible expense. It has nothing to do with, and it's, and it's, it's very specifically stated in the income tax Act. It's a non deductible expense. So the unfortunate misinformation that gets shared from social media and the misunderstanding that, you know, thinking that insurance is an expense versus an asset, the cash render value is an asset. Now you think that, oh, it's an expense, that means I can deduct it and then you take that deduction. And by the way, these are some of the things I even identify as part of the process of me onboarding a new client. I can see these things and there's some really important discussions that happen to make sure our clients are properly addressing and dealing with how to account for these, the specialized asset here.

Now in the case of the financial statement, we're looking at where we do see insurance. It's referencing things like probably professional fees like liability coverage, types of insurance that are necessary for the business to actually maintain staying in business. And because of that, it now meets the definition or the requirement of something that would be an appropriate expense. Just to clarify, that is what we're looking at in this situation.

Yeah. And I'm just going to take it a bit further, Richard. This is the industry specific to this is the Canadian hydraulics. So you can tell it's a, it's a, it's a kind of product oriented business or a machinery manufacturing oriented business. And we can kind of see from the previous one that property planning equipment. So a lot of that insurance is probably for the equipment and the machinery. So again with experience you, I can cut through and really pick that up. You can also see there's automobiles. So some of that insurance could be for premiums for the automobile. So there's a whole bunch of other things that you can glean on with an experienced, trained set of eyes. And one of the things again just to even look at is let's look at this type of business, they bring in this revenues. But in order to earn those revenues and bring it in, they actually have to have materials or someone to put the co like the product together. So there's costs to earn that revenue. So they really bring in. And this is called gross profit or gross margin $1.5 million. Now if I were to do a calculation just really quickly to look at comparing on the. This is the financial statement level where the gross profit is 1561 and the revenue is 3462. Just kind of remember this, the gross margin on this business on these sales is 45%. Now if we look at as an example for the business and what it did last year, you can see the year prior, the gross margin was 43%. So the indication that can happen from that is again, the sales are an accumulation of all of this activity of sales. So could it be the gross margin expanded in the next year? And that's a good thing. By the way, business owners who run a traditional business want gross margin expansion. Is it because they're charging a higher price for things now or they've been able to have cost efficiency, so they've decreased the cost. Either way it's translated to a higher gross margin percentage. And so these are some of the analyses that I would go through speaking with each and each individual client individually to their business so that I have a really good picture to understand how can I improve their situation? Because again, I'm trying to work with them. Can I actually improve them?

I think just to summarize what, what you're saying, Henry, is that look, this simple kind of quick calculation can help you understand a little bit of a trend. And then you can, because you understand what that trend looks like now you can ask the right questions to identify what is the creation of that trend. Okay, so we saw a positive movement on gross margin. That's great. Congratulations. What did you do differently in the business? Where did you see that you created that additional. Well, we hired a new sales guy or you know, like so whatever it is that they can identify, you now can help understand and not steer, but provide some coaching around.

Cool.

Based on what you achieved here, how do you see that progressing now next year in the business? Do you see that leveling up even further? Do you. Are you now looking at cost cutting measures and what would that look like because of the new sales guy? Does that create some scale for you that didn't exist before? So there's a whole line of questioning that can occur to begin to Have a deeper understanding now, not just about what has happened in the past, but what is the business owner planning to do in the future based on that. So, so you have like you're using the financial statements to create an information flow of questions to help determine and steer business proactively going forward.

Yeah. And, and this is the guidance that if I was a business owner and I have a professional working with me, I would hope that their experience can help me give me the guidance so that I know. So here's another example. If I use advertising and promotion, notice how that went down in the year and in that going down, but revenues went up, gross profit went up. So I would have a discussion with you, Richard. I'd be like, hey, what are you doing that's so good that you're actually spending less in advertising and marketing and you're actually increasing? Are you repeating the exact same thing next year? That's actually another point of the conversation as part of coaching that I would provide our clients to highlight. Look, you found some secret sauce here. Are you continuing doing that?

Yeah. And race, based on what you said. There's two things that I see, Henry, that I that kind of would, I would follow along with. Like what silks. Like here, like you increase the amount of commissions that you paid out. So is that because you, you sold more? Is that because you had more people to pay those commissions to? So what, what is that? So did you again, did you increase, did you hire another salesperson? What happened to increase that? Is it just based on top line revenue? Is there more to that commission increase? And is that why you were able to reduce marketing costs because you now have a better sales force and so you can be more efficient that way? And then the next thing I see on here, just again, quick observation, not that there's a huge jump, but bad debts went down from 26 grand down to 15 grand. So does that mean you increased recovery? Did you have another person or administrator focusing on recovering some bad debt that was owed to you? Are you getting better at that process? Are you making that more efficient? What does that look like going forward? So like there's a few items that just came out of the, the quick assessment that you identified just by looking at these numbers and starting to recognize previous year to this year, what created the difference in these gaps and getting the business owner to relate and explain that, that those items more, more clarity so they can even have a look back on the past to kind of say, oh yeah, that's right, we went and made this change and this change, and here's why we did that.

Yeah, I mean, Richard, you've got a lot of experience and really good insight also. So definitely these are the, this is just the kinds of conversation. So now you can hopefully appreciate how infuriated I was in for my client. Now, Mr. Dennis, where you had four years of an accumulated deficit, like how. How could you not get the support and help that you needed to come out of the situation? You have 40 years of experience, you're very, very capable. So what is the reason why you are still struggling? Because you were very successful before you left. So you were still trapped because of the issues that happened during the COVID lockdowns and you still have not recovered from it. So how can I support you to get there? And these are the, the vital pieces of guidance that business owners are sorely missing because they're not aligned with either the right professional in the form of experience, capability, or even just fit overall.

Yeah, fantastic. Love it. This is such good information. Henry. What, what a great benefit to be reviewing this for, folks. I hope they get a ton of value out of this because there's a tremendous need to be able to understand and assess these at the business owner level. But even for the professionals and the many, you know, individuals who, again, licensed individuals who watch our show and our program, perhaps there's some great insights they'll glean from this as well.

Yeah. And so the last one I want to go over is what I would consider very important statement. And this is called the statement of cash flows. It's a lot of information digest. It's not the exact same business because the academic example of showing doesn't have a cash flow statement, which again speaks to what I was sharing before that. There's a couple of things I just want to highlight as it relates to the cash flow statement. And this is a very, very valuable tip. And so the cash flow statement is actually structured into three categories. It's called the operating, investing and then the financing. So there's three segments to it. And most people will just look at, oh my ending cash is 76,000. And you ignore the whole middle activity in between. But the details of how the financial statements related to the cash flow statement, how it's structured, actually gives you a lot of powerful insight. And so here is some definitions that I'm just sharing here. So there's operating activities. The business has a model in how it earns revenue and costs and expenses. And if you see. So here you can see cash flow from operating is 325,000. So that means this business is a very solid business. It's running by itself the way that it's structured and it's earning 325,000. Now here's an indication where there's a problem. If the operating cash flows are negative, then you can actually interpret that well. If it's negative, how the business is currently running and the way that it's running, it's losing money. So something needs to be fixed. And if you can imagine if it's happening over a sustained period of time, we've got bigger, bigger problems. So this is how powerful this cash flow statement can be, if you know how to look at it and you know how to interpret the insights from it. The second section of the cash flow statement is called the investing activities. And in the investing activities, usually this is designated for, for the sections of the balance sheet related to long term assets, like fixed, fixed assets, property, plant and equipment. And so things that go into here will relate to those things. So here you can see the amount of items that was cash that was put towards those segments of the balance sheet is a cash outflow of 221,000. So I can immediately glean to say, okay, Richard, you actually acquired a cost amount of equipment worth 222,000. Then some of the questions, obviously the nature of what we do, I was like, oh, how did you pay for it? Then they're like, oh, I actually had to borrow money. And you can see they borrowed 126,000 from it to pay for that equipment. Roughly. So, you know, roughly, maybe it's 50% down payment, 50% finance through credit or loans. So those are the conversations that I would drill into having into that.

But now in the principal payments listed on there, Henry, would that be indicative of say, past or previous loans, amortized loans that might be on the books from past years where they're still making payments?

The principal payments essentially represent principal payments. So it's either done through the bank's scheduled, let's say monthly or biweekly, or it could have been the business owner's fear of debt. I'll just use an example to do.

Principal dump in lump sum payments. Exactly.

Got.

So it could be a combination of those working together.

Correct. I mean, you know, here's some of the things I can draw here, 325 from the operations. And so there's a whole bunch of excess cash flow that's sitting there and a whole bunch of it. So some of it got dumped into paying for equipment, but some, a lot of it also got dumped into paying for principal. So now I can actually even see how the capital was allocated to the particular business owner. So, I mean, if you just look at this, you're like, oh, my cash balance only went up 8744 if I'm looking at the balance sheet. But what you actually get a lot more is actually the details based on how the cash flow statement is structured. So some of the key takeaway points related to that is I think it's a big disservice that some of the professionals don't prepare cash flow statements for their clients. And it's unfortunate, but there's a lot of really powerful intelligence that you can gain from it. And, you know, one is we were just looking at the financial statements at that level, but what if we dive into the operational segment related to how long does it take for your business to convert to cash? If you're a traditional business where you have inventory and accounts receivable, you can have a million dollars in accounts receivable and you can have a million dollars in sales, but you're still poor because you have no cash, because all that cash is trapped in those accounts receivable. And if you don't have the experience, you may use traditional advice and say, oh, discount the accounts receivable so that you can incentivize early payments, or hire and train an employee to do the phone calls and follow up. But sometimes the business, specifically the position of that business, may not have the ability to do discounted accounts receivables because they have no influence and control over early payments. And at worst, if your business is reliant on serving large clients, those large clients dictate the terms. So if you introduce a discount to them as an example, they will still take the discount and pay you outside of that agreed upon payment window. So these are specific operational nuance that most business owners, you probably really want to have, again, that right hand next to you to know your business really, really well. And so I make it a very important thing for me to know my clients very, very well.

Henry, this is awesome. I appreciate, you know, taking a chance to go through some of these statements, discuss them, point out some highlights, walk through how those might be relevant to a discussion with a client, how to help coach them through a way of thinking about it being more heightened and aware around the operation and the flows of money going through it. Very, very important. And of course, just identifying the impact of financial professionals that surround business owners. And there's many of them that surround, and we are often One of those individuals that come and surround. But we like to work cohesively and in tandem with the other professionals. And so there's often sometimes a lot of tug of war, push pull type scenarios that happen around a family's financial circumstances or the business specifically. And you know, it's not necessary. You know, there's, there's a, there's a lot of opportunity for people to rally around a vision of that business owner and the success that they're looking to achieve and work together cohesively to really try to help move the dial for them long term on what's available, both on their ability to reduce, minimize, save on tax, you know, create capitalization that they can use to grow and re engage their business to maximize it without having to deal with third party lenders that muck up the works. So there's a lot of tremendous potential there. Before we, you know, end off here, any final statements, Henry, that you'd like to leave?

Yeah, thanks. I just really wanted to share, as you were kind of sharing all of that, the one who actually takes all the brunt of the cost to please, please everyone else is actually the business owner. Because you're trying to please and make sure you're not upsetting your financial professional or whatever. You know, like it's time to take that power back and wrap that vision and have them be attracted to, want to be supporting you on your journey and all of that. Because, you know, today's a challenging time in Canada with all the kinds of political and economic climate we have. I'm just going to argue the reason why I wanted to do this podcast with you, Richard. Today is as a business owner, conventional traditional financial services and what you're currently getting is likely not good enough anymore. And if you don't possess the language or the skills to analyze the financial statements for your own business, then you need to surround yourself with that professional to complement that deficiency that knows the language and has the skills and care enough to be willing to go to bat for you and help you. Because you need to know the specific actions so that you can take to improve your business position. And this, a lot of it does come down to the mindset. And I'm just going to add into that as an example, just some people who think about the infinite banking concept as a strategy, they just don't get it. It's a concept and has principles and in the hands of the policy owner, coached with a very capable professional and team aligned with that mindset, it truly transforms people's lives and it changes one from the lack and scarcity to one of abundance. And it can be for you if you take this concept seriously. And that's why I really hope that you're listening to the podcast that we just shared, and you've gotten a lot of value out of it. But this is really now back to you, that you've got to take the power back in your hands, gain that knowledge, gain that skill, gain that experience, so that this is how you can get further ahead, especially in the environment that we're in.

Yeah. Absolutely. Fantastic. Now, of course, for those of you watching on YouTube, as always, poof, there's a magical little video that popped up that says, oh, my God, I'm amazing content. Please watch me. So we're going to say go ahead and do that, and we'll catch you on next week's incredible episode.