WEBVTT

1
00:00:00.000 --> 00:00:06.060
Net free cash flow, all right, say it and then imprint it into your minds

2
00:00:06.900 --> 00:00:09.920
Welcome to the game where we talk about how to get more customers how to make more

3
00:00:09.920 --> 00:00:13.740
Procure and how to keep them longer in the many failures and lessons we have learned along the way

4
00:00:13.740 --> 00:00:15.240
I hope you enjoy and subscribe

5
00:00:15.240 --> 00:00:18.040
What's going everyone in this video? I'm going to show you the number one mistake

6
00:00:18.540 --> 00:00:23.920
That I made and that I see a lot of entrepreneurs making in terms of how to make more money from more money from their business

7
00:00:24.440 --> 00:00:29.840
So the number one metric that I track for our businesses is this one

8
00:00:29.840 --> 00:00:36.860
You may not even hover this one, but I think it is the most important and Warren Buffett agrees with me. All right, it's net

9
00:00:37.640 --> 00:00:38.920
free

10
00:00:38.920 --> 00:00:43.800
Cash flow, all right say it and then imprint it into your minds, all right and

11
00:00:44.680 --> 00:00:47.080
Obviously this depends on what type of business you're running

12
00:00:47.160 --> 00:00:54.320
But what net free cash flow is is the amount of money that an owner of a business can take out of the business after

13
00:00:54.640 --> 00:01:00.640
The business reinvests in staying ahead of the competition and maintaining its competitive advantage, right?

14
00:01:00.640 --> 00:01:07.920
And so the problem with the vast majority of businesses and or business owners is that what they do is at some level

15
00:01:07.920 --> 00:01:10.560
I mean the first problem is that many of them don't make any profit, right?

16
00:01:10.560 --> 00:01:16.320
So that's probably like problem number one and when you say I'm reinvesting the business and the reality is that you're not making a profit

17
00:01:16.320 --> 00:01:19.120
You need to be real with yourself. That's probably what's happening

18
00:01:19.920 --> 00:01:23.200
Category two is a type of businesses that are making a profit

19
00:01:23.840 --> 00:01:28.080
But then they take that profit and they reinvest it back into the business now

20
00:01:28.080 --> 00:01:30.960
I'm not saying that this is necessarily a bad idea

21
00:01:31.440 --> 00:01:34.640
I'm saying that for me in my entrepreneurial experience

22
00:01:35.360 --> 00:01:41.920
I like to take money out of businesses. I like to make money while I'm growing businesses and this comes hard learned

23
00:01:42.720 --> 00:01:44.720
because in my first

24
00:01:45.040 --> 00:01:49.360
Five years when I started my businesses at the time I was starting gyms

25
00:01:50.240 --> 00:01:52.240
And online fitness coaching business too

26
00:01:52.640 --> 00:01:58.800
Whenever I would make money from my gym I would open up another location which sucked right?

27
00:01:59.600 --> 00:02:03.440
I mean it sounds great and but I was asset rich and cash poor

28
00:02:03.760 --> 00:02:08.000
All right, and that may be a problem that you were suffering from too. I had equipment

29
00:02:08.080 --> 00:02:12.880
I had leases I had flooring I had signage I had lobbies I had front desks I had glass walls

30
00:02:12.880 --> 00:02:15.680
I had all of the things except for money in my bank account

31
00:02:16.160 --> 00:02:18.480
And what ended up happening is I actually

32
00:02:19.760 --> 00:02:22.880
At after after three four five whatever years it was

33
00:02:23.280 --> 00:02:24.240
um

34
00:02:24.240 --> 00:02:26.240
When I sold those companies

35
00:02:26.640 --> 00:02:31.200
I ended up getting out of them relatively quickly and I took all the money I got from those sales

36
00:02:31.200 --> 00:02:33.600
Which I would consider like short sale. They were kind of garage sales

37
00:02:33.600 --> 00:02:38.480
I pretty much just sold them as assets rather than as businesses because I wanted to do this new thing which is gym

38
00:02:39.280 --> 00:02:39.840
um

39
00:02:39.840 --> 00:02:42.880
But what ended up happening though is I took all that money and I went into a new venture

40
00:02:42.880 --> 00:02:46.400
So gym watch happened after this, but there was a little period of time there where I

41
00:02:47.200 --> 00:02:52.160
Did something new with a partner that I thought I was gonna be partnered with and I'll just say in short terms

42
00:02:52.240 --> 00:02:58.800
It didn't work out and so what ended up happening is I didn't get a ton of money for the gyms that I sold and then all that money

43
00:02:59.520 --> 00:03:01.040
disappeared

44
00:03:01.040 --> 00:03:03.040
And at that moment I promised myself

45
00:03:03.600 --> 00:03:07.520
I'm never making the mistake miss mistake again because what ended up happening is that after all those years and all that

46
00:03:07.600 --> 00:03:10.480
You know all that time and the money that I had made all of it was gone

47
00:03:11.360 --> 00:03:16.800
I was like I've made millions at that point dollars in revenue right and I

48
00:03:17.440 --> 00:03:19.280
Had I had nothing you know what I mean

49
00:03:19.840 --> 00:03:24.720
And so I see this a lot and the thing is is that a lot of us entrepreneurs have this dream that someday

50
00:03:24.720 --> 00:03:31.040
We're gonna sell the reality is the chips are stacked against you all right 99% of businesses don't get sold ever

51
00:03:31.440 --> 00:03:35.280
Right and so this idea that we're gonna have this mythical exit someday, right?

52
00:03:35.760 --> 00:03:44.000
For most businesses isn't true and of the of the businesses that it is true many of those exits aren't as sexy as they may sound like right

53
00:03:44.000 --> 00:03:48.640
Like I technically exited those businesses, but it wasn't like you know, I wasn't set for life

54
00:03:49.120 --> 00:03:54.240
All right, you know, I mean, I think it was like multiple it was like 200 grand 300 it wasn't a lot of money

55
00:03:54.960 --> 00:03:57.760
That I made from those I think I sold all in all

56
00:03:58.800 --> 00:04:01.760
Covering partnerships and all that stuff. I think I all in got

57
00:04:02.400 --> 00:04:07.840
200 grand I think for selling six locations like it was just not a lot right and

58
00:04:09.600 --> 00:04:14.080
If you've been doing this for years then that exit if you've been like I'd been doing this for at that time

59
00:04:14.080 --> 00:04:17.360
I think for four or five years like that's like 40 grand a year, right?

60
00:04:17.920 --> 00:04:21.360
If I had been just ripping cash out of the business and stacking at the whole time

61
00:04:21.600 --> 00:04:23.600
I would have had a lot more money than that at that point right

62
00:04:24.320 --> 00:04:29.200
And so this is a mistake that I see a lot of entrepreneurs make is that they're not focused on this

63
00:04:29.920 --> 00:04:35.360
Net free cash flow, right? They're not thinking how can I take money out of this business every single year

64
00:04:35.360 --> 00:04:41.440
How can this business pump out profits while I still continue to grow it and some of that also comes from the expectation of how

65
00:04:41.920 --> 00:04:47.360
Quickly I want to grow so a lot of times we want to grow really fast for no reason only the arbitrary reasons that we set for ourselves and the

66
00:04:47.360 --> 00:04:51.600
Expectations of others that we project right, but there's really no reason to do it

67
00:04:51.840 --> 00:04:57.120
But we end up just growing irresponsibly and then in so doing do it wastefully

68
00:04:57.600 --> 00:05:04.080
And expose ourselves to higher risk and more mistakes and in the process also lose the one thing that we get along the way

69
00:05:04.240 --> 00:05:08.480
If you do it the right way, which is net free cash flow is in like getting paid to grow your business

70
00:05:08.800 --> 00:05:10.800
I try I remember I sat down with some of my employees

71
00:05:11.600 --> 00:05:13.520
Probably eight years ago. It was actually at the gyms

72
00:05:13.680 --> 00:05:16.800
And I think that they had said that they wanted to get a raise or something like I can't remember where it was

73
00:05:17.840 --> 00:05:20.160
And I was like do you understand the difference between like

74
00:05:20.720 --> 00:05:25.440
Imagine working for an entire month, right working around us off every hour of the day, right?

75
00:05:25.920 --> 00:05:28.880
And then at the end of the month not only did I not pay you

76
00:05:29.440 --> 00:05:32.480
I just cleaned out your savings for working that hard

77
00:05:33.280 --> 00:05:38.240
And they're like yeah, that would suck and I'm like that happens to me all the time, right?

78
00:05:38.880 --> 00:05:45.040
And so that's the thing is we take on so much risk and you start to get used to the risk because you've just been doing it for such a long time

79
00:05:45.280 --> 00:05:49.280
But you have to reward yourself for the risk that you were taking all right now

80
00:05:50.160 --> 00:05:55.440
The reason that I like net free cash flow is that it focuses the entire company on not just making a profit

81
00:05:55.680 --> 00:06:00.640
But making a profit in excess of what is required to continue to run and grow the business all right

82
00:06:01.360 --> 00:06:02.880
And so

83
00:06:02.880 --> 00:06:09.200
This is the number one step that I look at this is what I have my financial report on for all of our entities

84
00:06:09.680 --> 00:06:12.640
Because this is the real real this is owner earnings

85
00:06:12.880 --> 00:06:18.080
This is what Warren Buffett and Charlie Munger calculate with the companies that they want to buy because they're like

86
00:06:18.160 --> 00:06:23.520
We hate companies where we buy them and then we take all the profit and have to reinvest all that money back into the same business

87
00:06:23.920 --> 00:06:25.520
Right they're like that sucks

88
00:06:25.520 --> 00:06:30.560
They're that's why they said they don't like manufacturing and they don't like a lot of types of companies where you have to have all these capital expenses

89
00:06:30.560 --> 00:06:36.320
Meaning money expenses that you buy big stuff that you you know depreciate over time. They're like that sucks, right?

90
00:06:37.280 --> 00:06:38.560
And so

91
00:06:38.560 --> 00:06:43.200
net free cash flow is the stat that I track and if you were interested at all

92
00:06:43.760 --> 00:06:48.560
I was reading a book recently called the little book that beats the market really good book you can read in one sitting

93
00:06:50.000 --> 00:06:55.680
Really fascinating actually and he posits that there are only two metrics that are really important

94
00:06:56.080 --> 00:06:59.120
For tracking for really getting above average returns, right?

95
00:06:59.360 --> 00:07:02.240
The first is the PE ratio, which is the price to earnings ratio

96
00:07:02.560 --> 00:07:05.280
And if you think about what Warren Buffett talks about in terms of buying businesses

97
00:07:05.280 --> 00:07:07.840
He says you want to buy good businesses for cheap prices, right?

98
00:07:08.160 --> 00:07:12.160
So the figuring out whether it's a cheap price is going to be the price to earnings ratio how much how much

99
00:07:12.960 --> 00:07:17.120
Nephi cash flow how much how much earnings is this company creating not that those are the same thing

100
00:07:17.120 --> 00:07:23.520
But I'm just saying generally right um how much how much how much what's the earnings of this company and what's the price for those earnings all right

101
00:07:25.920 --> 00:07:33.200
You guys love that you're listening to the podcast if you ever want to have the video version of this which usually has more facts more visuals more

102
00:07:33.200 --> 00:07:38.160
Graphs, you know drawn out stuff sometimes it can help hit the brain centers in different ways

103
00:07:38.240 --> 00:07:43.680
You can check my youtube channel. It's absolutely free to check that out if that's what you are into and if not keep enjoying the show

104
00:07:46.480 --> 00:07:51.680
So this is number one so ideally you want a really low price for really high earnings now the second thing

105
00:07:52.880 --> 00:07:54.880
Is a return on capital?

106
00:07:56.080 --> 00:08:01.280
And so what that means is now imagine a company that has I'll give you two scenarios. Let's say we've got a company that

107
00:08:02.640 --> 00:08:07.520
You know, let's say they make a million dollars in profit and when they reinvest a million dollars in profit into their company

108
00:08:08.080 --> 00:08:11.920
Let's say it's opening locations just for whatever reason right so when they open a new location

109
00:08:12.240 --> 00:08:17.920
And front a cost of a million dollars open location and then that location gets them a hundred thousand dollars a year in additional earnings

110
00:08:18.240 --> 00:08:19.200
all right

111
00:08:19.200 --> 00:08:23.920
That's a 10% return on capital right that's what that means now

112
00:08:23.920 --> 00:08:26.560
Let's take an alternative scenario. Let's say that another company

113
00:08:27.360 --> 00:08:29.360
For a million dollars can open 10 locations

114
00:08:30.480 --> 00:08:36.640
And each of those locations can do a hundred thousand dollars a year right that would be a 100% return on capital

115
00:08:37.200 --> 00:08:39.360
And so the beauty of these two metrics is

116
00:08:40.560 --> 00:08:45.920
The PE the price to earning ratio tells you this is a is the price of the business we're buying

117
00:08:45.920 --> 00:08:51.600
This is a cheaper business right the return on capital tells us the quality of the business that we're buying

118
00:08:51.760 --> 00:08:57.600
Which is how good is this business a great business as a business that can take a small amount of money make and generate lots of cash from it

119
00:08:57.920 --> 00:09:04.320
Right and so by combining these two things finding the companies that have the lowest PE ratio with the highest return on capital

120
00:09:04.560 --> 00:09:06.320
You can consistently beat the market

121
00:09:06.320 --> 00:09:08.240
That was kind of the premise of the book which actually really interesting

122
00:09:08.240 --> 00:09:13.680
They they use this algorithm that did these two things and they beat the the S&P 500 which is basically on the same

123
00:09:13.680 --> 00:09:15.920
Possible it's it's very difficult to do for most people

124
00:09:16.720 --> 00:09:19.840
And they beat it for I think like 25 years which is nuts

125
00:09:20.720 --> 00:09:22.480
By a big percentage which was crazy

126
00:09:22.480 --> 00:09:26.560
The thing is is that the companies that are usually in this bucket are usually companies that are going through issues

127
00:09:26.880 --> 00:09:32.720
And so you're basically buying mispriced bets right and half the companies that you buy that that meet these two qualifications

128
00:09:32.800 --> 00:09:39.440
End of tanking but the other half that might have had some bad press because of something are disproportionately discounted in pricing

129
00:09:40.720 --> 00:09:48.800
And as a result in the future they they outperform the price that you're paying for them right and so to to bring the wagon back around here

130
00:09:49.520 --> 00:09:51.040
As business owners

131
00:09:51.040 --> 00:09:54.720
Neffrey cash flow is my home base. This is what I care about

132
00:09:54.960 --> 00:09:59.760
This is the money that I get to deposit at the end of every month because tomorrow may never come

133
00:09:59.840 --> 00:10:06.080
We may get outlawed our business may be outlawed there may be there may be some horrendous thing that happens that

134
00:10:06.160 --> 00:10:07.440
blows your business up

135
00:10:07.440 --> 00:10:11.200
You may have to move locations and stop everything that you're doing and you just don't know

136
00:10:11.760 --> 00:10:16.720
And so what we are all exposed to that we discount on a regular basis is something called operational risk

137
00:10:16.800 --> 00:10:22.960
We are all exposed right and so if you're doing this for one year two you're five years solely

138
00:10:23.360 --> 00:10:25.920
With the hope that someday you're going to sell

139
00:10:26.400 --> 00:10:31.680
Well, I just want to break the news to you that you have a 99 to one chance of not actually succeeding doing that

140
00:10:32.400 --> 00:10:35.840
And see might as well take some money out of out of the business every month

141
00:10:36.320 --> 00:10:39.840
So you know you make money along the way and I can promise you having done it both ways

142
00:10:40.800 --> 00:10:43.440
Taking money out of the business every month is way more fun

143
00:10:43.760 --> 00:10:45.520
It's also way less stressful

144
00:10:45.520 --> 00:10:49.840
All right, because this is going to be the stuff that allows you to know every month how we're really doing

145
00:10:50.080 --> 00:10:53.120
When you always leave it in the business account you will always leave it in there

146
00:10:53.120 --> 00:10:54.880
You just don't have a feeling for it

147
00:10:54.880 --> 00:10:59.120
But you should be able to deposit money in your account this month and be like this was better than last month

148
00:10:59.200 --> 00:11:02.240
Or this was worse than last month and you got to feel that not just the numbers

149
00:11:02.240 --> 00:11:05.040
But literally what you put into your account all right, and so

150
00:11:05.760 --> 00:11:07.760
I'll give you one easy tactic

151
00:11:08.000 --> 00:11:11.840
That I was working with one of the one of the companies that I have an equity interest in

152
00:11:12.800 --> 00:11:13.840
Um

153
00:11:13.920 --> 00:11:18.320
Let's let's imagine you've got a big bucket of money all right. This is your bank account for your business

154
00:11:19.280 --> 00:11:24.400
Every month you know after a certain amount of months what your projected fixed costs are going to be all right

155
00:11:25.120 --> 00:11:27.280
Now what I asked this entrepreneur to do

156
00:11:27.920 --> 00:11:29.280
Because he wasn't taking profit of the business

157
00:11:29.280 --> 00:11:32.960
So I was like hey we're gonna fix this right now is you need to come up with a line

158
00:11:33.360 --> 00:11:37.920
And you say this is our line. This is our non-negotiable everything over this

159
00:11:39.440 --> 00:11:43.520
We take out every month all right, so everything over a hundred grand everything over 500 grand

160
00:11:43.520 --> 00:11:46.880
We're going to take out of the business every single one. We're the clear this bitch

161
00:11:47.120 --> 00:11:52.480
Right all the way down to the bottom and by doing this you hold yourself accountable to this level

162
00:11:52.800 --> 00:11:57.200
All right, and so to wrap this puppy up if you're not taking profit out of the business

163
00:11:57.440 --> 00:12:00.160
I'd highly recommend doing it number one number two

164
00:12:00.640 --> 00:12:05.120
If you're not measuring net free cash flow you absolutely should because you're losing out on one of the most important metrics

165
00:12:05.120 --> 00:12:07.440
This is what Charlie Margaret looks at. This is what Warren Buffett looks at

166
00:12:07.600 --> 00:12:10.720
This is what I look at not that I'm in the same categories as those guys

167
00:12:10.960 --> 00:12:13.920
But once I switch to this in terms of my finance and reporting

168
00:12:14.080 --> 00:12:17.280
It really clarified it for everything just not just for me, but also for my team

169
00:12:17.600 --> 00:12:20.080
All right, and when you're looking at businesses in general

170
00:12:20.160 --> 00:12:25.360
If you're thinking about reinvesting in the business make sure that the dollars that you're choosing to reinvest

171
00:12:25.920 --> 00:12:29.920
You're getting the best return on capital you possibly can all right

172
00:12:29.920 --> 00:12:33.280
So if you're reinvesting the business and you think you're gonna get 10% back

173
00:12:33.520 --> 00:12:37.600
We might as well just put it in the S&P and get that right and not even have to deal with all the mess

174
00:12:37.920 --> 00:12:39.120
And that's okay

175
00:12:39.120 --> 00:12:43.360
If you make a million bucks here you make 500,000 a year and you just put it in the S&P every single year

176
00:12:43.520 --> 00:12:45.520
You're gonna be really really wealthy

177
00:12:45.840 --> 00:12:47.040
Right and that's okay

178
00:12:47.040 --> 00:12:49.920
And so sometimes your wealth doesn't necessarily have to be generated

179
00:12:50.320 --> 00:12:54.880
All entirely from your business or from a sale that you someday hope to achieve that may not actually happen

180
00:12:56.240 --> 00:12:57.760
Okay

181
00:12:57.760 --> 00:12:58.800
That's all I got for you

182
00:12:58.800 --> 00:13:01.360
So that's my my my moment for the day

183
00:13:01.360 --> 00:13:07.280
Neffrey cash flow, track it, stack it, and make sure that you enter your bank account every single month

184
00:13:07.280 --> 00:13:09.360
And stack the right account, which is your personal bank account

185
00:13:09.360 --> 00:13:10.640
Lots of love. Can you see? Bye

186
00:13:13.360 --> 00:13:15.760
You