Doug Fath and Jeff Greco discuss the financial rituals of successful real estate investors and business owners in their latest video. Click the video below to watch now.
| Doug Fath: | Hey, I’m Doug Fath of Legacy Capital.
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| Jeff Greco: | Jeff Greco, also of Legacy Capital.
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| Doug Fath: | In this video we’re going to be talking about financial rituals and the importance that that plays in your business. Before we get into the specifics of what you want those rituals to look like, really in order to set yourself up to have those rituals, you need to make sure that a bookkeeper is on your team because it’s really the bookkeeper that is going to handle these items for you. Depending on where you are in the life of your real estate business, in one of the previous videos we spoke about the four stages of a real estate business owner. Regardless of what level you’re at, having a bookkeeper really is a must to have on your team in order to set the stage for you to have these financial rituals and have the financial be accurate.
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| Jeff Greco: | In previous videos we talked about the symbolic of having it be like a sporting event. As business owners we’re the players in the arena on the field and really having a bookkeeper be the scorekeeper telling you how well you’re doing, how well you’re not doing and so forth. Really, what we’re going to go into in this video is talking about how we integrate having the scorekeeper really make a difference in providing financial data but also giving you information to be able to make decisions in your business going forward.
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| Doug Fath: | Absolutely. The first thing that you want for your financial rituals is that you need to be looking at the three financial statements on a regular basis at minimum once a month in your business. By the three financial statements, we have the profit loss, the balance sheet and the cash flow statement. Each one of those reports tell you different things about your business. Then the three reports together give you another view on how your business is performing. Very simply, probably the one most people are familiar with is the profit loss statement, which simply takes and shows all of your income, all of your expenses. Then hopefully, underneath that line, that’s a positive number, leaving you with net income, profit each month.
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| Jeff Greco: | Which is a good thing.
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| Doug Fath: | A good thing, yes, absolutely. The second statement is the balance sheet, and that simply gives you an accounting of all of your assets minus your liabilities, which gives you your equity in the company. For you as a real estate investor, you’re certainly going to have profit loss, but you’re also going to have balance sheet activity, which is going to list again, all the properties that you own as well as debts and mortgages that you have along with that.
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| Jeff Greco: | Specifically for our clients, our clients are typically more of fix and flip based or fix and hold based. When you’re running a rental portfolio you’ll be more balance sheet based for the longer term. When you’re doing fix and flips, typically, under a year, typically, more activity on the profit loss statement.
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| Doug Fath: | Then the final statement is the cash flow statement. Essentially, the cash flow statement gives you an accounting of your operating activities, your investing activities, and your financing activities from a cash basis, from a cash standpoint. It’s one thing to make money, but your cash flow statement lets you know how much cash either increased or decreased for that time period. As I mentioned, having an understanding of these three reports individually is helpful, but then also how they interact and talk with one another is important. You can get into that and then really the analysis of these three financial reports when you have your financial meeting. You should be having financial meetings with your bookkeeper a minimum of once a month where you’re reviewing the data from those three financial statements and interpreting that data, so that then you as the business owner can make decisions about that for your business.
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| Jeff Greco: | A typical structure, a simple way to get this implemented in our business we found is that you have an agreement with your bookkeeper that by a certain day of the month whether it’s the 5th or the 10th, that the financial statements are actually emailed to the business owner. Then there’s some sort of time period, a few days to review it, maybe make some comments on something that seems out of the ordinary, and then having a financial meeting whether it be the 15th of the month or somewhere around the middle of the month to review the previous month activity. This way everyone is in a rhythm, people know what to expect. If there are questions, or people aren’t able to hit deadlines to meet this, everyone really has the information on time as expected and of course, if corrections need to be made, you could do so at that time.
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| Doug Fath: | Absolutely. Then the final piece of your financial rituals are cash flow allocations. Again, once you’ve got your three financial statements, you’ve had your meeting, you’ve interpreted that data, hopefully, there’s free cash flow or surplus cash flow that you then can allocate towards a few different options. We actually have another video where we go into detail of cash flow management and cash flow allocation, but this becomes a super important piece that you want to incorporate in your rituals because again, as you escalate to the different stages of a real estate business owner, once you’re producing free cash flow, how you’re allocating that cash flow becomes super important for not only the foundation of your business but also being able to grow and scale your business based on how you’re allocating that free cash flow.
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| Jeff Greco: | Right. Also, as business owners we’re typically very hard on ourselves to make sure that the numbers say a certain thing. I think first and foremost really, the success is getting inside of the system or actually reporting on the numbers, taking a look at all the numbers together. As Peter Drucker, a famous management consultant said, “What gets measured gets improved.” Really, the first goal or the first hurdle is really just getting your finances measured and have a system to do so. As you start to get into the flow and have regular meetings and having your bookkeeper providing these statements is really when the magic happens in terms of actually getting to improve these. First and foremost, goal number one is really just have a system in place, so you actually can keep the score of your business.
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