If I was starting from zero and I wanted to increase my financial literacy really quickly and efficiently because I was running a business, stepping into a new role in management, investing in a business, or I was just an up and comer and I wanted to understand the story behind the numbers, here's exactly where I'd focus. I'm going to keep things really high level to give you the roadmap and then you could always dive deeper according to your needs and desires.

Let's start with the financial statements. There's three that you need to know. The income statement, the balance sheet, and the statement of cash flows. The statement of cash flows is the most important one to pay attention to, but let's start with the income statement because this is the most common.

The income statement is also known as the P&L, the profit and loss statement, and it tells you how much revenue or sales is a company generating, what is its cost structure, and at the end of the day, is it earning a profit or a loss? We'll get into the details of the income statement later on, but let's just leave it there.

Moving on to the balance sheet. The balance sheet has three main accounts, assets, equal liabilities, plus equity. Under assets and liabilities, there are two subcategories, current and non-current. Current just means within one year.

For current assets, it means accounts that are collectible or can be converted into cash within a 12 month timeframe. Likewise, with current liabilities, those accounts represent items that are due and payable within one year. When you hear current or see current, it's within one year.

Under current assets, we have cash, inventory, accounts receivable, the amount of money that's collectible from customers, and prepaids. Those are the main accounts. Under non-current assets, we have items such as property, plant, and equipment, and other investments in businesses, et cetera.

In other words, these are assets that won't be converted into cash within a 12 month timeframe because you're holding them for the long term. When you hear the term PP&E, or you see that, it just stands for property, plant, and equipment. Sometimes you'll see FF&E, furniture, fixtures, and equipment.

It's all the same stuff. It's the trucks, the trailers, the tractors, the buildings, et cetera, to run your business. Under current liabilities, you typically have accounts payable. That's the amount of money you owe to your trade vendors.

You may have some accruals, payroll liabilities, et cetera. Maybe you have credit cards that you're using as a revolving line. That may go under there because it's due and payable within 12 months because you're constantly using this revolver.

If you have long-term debt, that's going to sit under non-current liabilities because it's not due and payable all within one year. You'd split that out. The current portion of the debt in the current year would go into current liabilities, and then the long-term portion would sit under non-current liabilities.

With equity, it doesn't have to be that complicated, but I remember in school, it was just super confusing for me. Let me just try to keep it simple. Equity just represents the amount of money that you put into the business, the amount of money you take out of the business, and the retained earnings.

Retained earnings is composed of all of the earnings accumulated over the years, plus the current year's net income. That's how the balance sheet ties back to the income statement with the commonality of net income hitting equity. Everything flows through the income statement and the net income goes under equity, and then that's how a balance sheet ties back to, like I said, the income statement.

Now, the statement of cash flows has three main categories, cash from operating activities, cash from investing activities, and cash from financing activities. Cash from operating activities just represents the amount of cash that the core operations of the business generates.

It starts with net income. There are adjustments for non-cash items. You also account for changes in working capital, and you end up with operating cash flow. Then under investing activities, you account for capital expenditures.

That's when you're purchasing trucks, trailers, tractors, et cetera, for your business, or making other investments, or you're selling CapEx, or you're liquidating investments and you're getting cash from those investing activities. In other words, it's cash coming in, cash going out for investment-related activities. It says it in the name.

Now, the last section, financing activities, this represents all the cash that is generated from raising capital. If you go out there and you sell equity in exchange for cash, you're going to record that inflow of cash under financing activities.

If you take on debt and you get cash from debt, in other words, you take on a note, and then that cash goes into your bank account, you're recording that cash under financing activities.

Likewise, if you pay off investors or you pay down your debt, those outflows go into the same section, financing activities. Those are the three main sections. I know I'm going fast.

Cash from operating activities, cash from investing, and cash from financing. Add those all up together. You come up with the change in cash over the period.

Add that to your beginning balance. You arrive at your ending balance of cash, and that ties back to your balance sheet. We start with net income, which is the bottom of the income statement.

We account for all the changes on the balance sheet. Then at the end of the day, we tie back to cash that hits the balance sheet. That's how these three financial statements tie together from a high level.

The first thing you need to do is understand these three financial statements. They're really not that scary, but when you understand them and you know what's on each financial statement, then you won't look like an idiot by asking for the wrong report or when you're sitting in a meeting and you say something and they're like, come on, Steve, you should know that.

It's okay to not have financial literacy. Trust me, when I ran my first business, I had no clue how to read financials. Here I was running a multimillion dollar business in my early 20s, and I couldn't even tell you what the three levers were to improve my gross profit. I didn't know what free cashflow was.

Don't feel bad if that's where you're at. That's fine. Just understand the three financial statements.

At Coltivar.com, if you go to Coltivar.com forward slash BYFIQ, which stands for boosting your financial IQ, we have a free financial pro course. Literally, I have lessons where I'll walk you through how to understand the financial statements. That's my gift to you.

It's totally free. Just sign up. It comes with an app.

You could download the app through the Apple store or through the Google play store. BYFIQ, boosting your financial IQ, learn on the go, listen to this stuff. And that's one way to understand how to read these financials.

So that's the first thing I would do is I'd understand the income statement, the balance sheet, and the statement of cash flows, especially the statement of cash flows. If you can understand that financial statement, it's going to set you far beyond your peers, and it's going to make you look really smart. So that's where I'd focus.

Okay. Next, I would learn how to analyze these financial statements. I'm just going to give you a few things. Okay. I'm just going to walk you through a few things.

There are so many other things you can look at, but just from a high level on the income statement, I like to look at the gross profit margin. And I like to see a gross profit margin greater than 40% because this reflects profitability after direct cost. And it tells you whether or not the business can sell at the right volume, at the right price and at the right cost structure.

Next, I move on to operating profit margin. And I like to see companies with at least a 10% operating profit margin. Now I know that varies by industry — for some businesses, that number should be a lot higher, for others, it may be slightly lower. It just depends on the competitive nature of the industry. But those are two things I'll look at: gross profit margin and operating profit margin.

And then I'll also look at things like interest coverage ratio, and that should be greater than three. So I know that the business can cover its interest obligations on its debt. It can service its debt, in other words.

And then I'll also look at EBITDA margin. And EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. And I like to see that above 15%.

Okay. Moving on to the balance sheet. Like I said, I know I'm going fast, but I just want to get enough of this in, in a succinct manner.

I'll look at the balance sheet. And first thing I'll do is I'll just see: is cash greater than debt? And if yes, that's a good indicator.

Next, I look at the current ratio. So I take current assets divided by current liabilities. And I want to see a ratio greater than 1.2, but usually lower than three.

In this situation, it's kind of weird because you don't want a huge or a high ratio, because that means that the company's sitting on all this cash and they're not using their assets effectively to grow and scale the business. Right? So the number can be too high, but you want it to be at least 1.2, because it will tell you that it's in a good position to cover its liabilities.

I'll also look at things like debt to EBITDA. And I want to see that less than 3.5, because that will tell you how many years it would take to pay off the debt. And if debt to EBITDA is greater than 3.5, it means that you're going to spend more than three and a half years of profit just to pay off the existing debt.

There are other things like retained earnings growth and invested capital turnover, et cetera, but I'll just leave those for later.

Then from a cash flow statement standpoint, I like to look at CapEx as a percentage of operating profit. And I want to see CapEx to be less than 25%, because I don't want more than a quarter of operating profit to go towards equipment.

So I like to invest in low capital intensive businesses, because if not, it just sucks up a lot of your cash.

Next, I'll look at free cash flow as a percentage of revenue. And I'd like to see that greater than 7%. And you could find free cash flow by taking cash from operating activities minus CapEx or capital expenditures under investing activities.

Also look at cash conversion in days, and I want to see that less than 30, if possible.

Those are the main metrics that I look at on those three financial statements just really quickly. I definitely analyze businesses more in depth, but you can learn about that in the financial pro course, if you take that for free or on your own, as you discover the best things for you and your company to evaluate.

But overall, see, I'm a big strategy guy. I like to understand a company strategy, and then I like to know how that strategy is going to influence the business.

And I think there are three main metrics from a high level that I like to evaluate, because it will tell me how efficient is the business at executing on a strategy and generating returns. And I like to call these the three efficiencies.

First, there's LTGP to CAC, which stands for Lifetime Gross Profit to Customer Acquisition Cost. In that ratio, I like to see greater than 3X. And this tells me if the business has a strong sales and marketing engine. In other words, are they efficient with their sales?

Also, I like to look at their labor efficiency, and I measure that by return on labor. Return on labor, I calculate that as NOPAT divided by total labor spend, or I could look at gross profit divided by total labor spend. But for this scenario, NOPAT divided by total labor spend should be greater than 30%.

So that'll tell you if a company is earning net operating profit after tax in comparison to its return on labor at a healthy rate. And I want to see that above 30%.

And then lastly, I will look at the value creation efficiency of the business as measured by return on invested capital. And that's computed by taking NOPAT, once again, net operating profit after tax, divided by invested capital. And if it's greater than 15%, hooray, the business is generating value. Because in the stock market, you can earn 10% returns by doing nothing.

All right? So those are the three main metrics that measure the efficiency of a business.

Okay. So let me take a step back. If you're starting from ground zero, you first have to understand the three financial statements. You could take the financial pro course at coltivar.com forward slash BYFIQ. That's super valuable and it's free.

Next, you have to understand the ratios in order to analyze a financial statement. That's going to be really critical. Keep it simple.

If you need to, if you have a CFO, work with your CFO. If you don't have a CFO, talk to your CPA or accountant or whoever you partner with.

When we work with companies, that's the first thing we do. We help the management team understand their numbers, not from a nerdy perspective, but at a level that's sufficient so they can actually grow the business.

All right. So I'm just walking you through what I would do and how I help people that I work with to increase their financial literacy.

Okay. The next thing is on Coltivar's website. And hopefully I'm not coming across like, oh, go to Coltivar, go to Coltivar. There are other resources out there.

I'm just giving you stuff that's free. And I think a lot of our stuff that's free is way better than the paid stuff that exists out there.

At coltivar.com under tools, you'll find a variety of calculators. So if you want to find the four levers of profit and which one's best to pull in your business, if you want to find your break even point, if you want to figure out your value gap or your profit gap, or how much cash you need on hand, there's so many calculators that we've developed.

They're totally free. You don't have to opt in. You just go to the website under tools, click on calculators, and there you go. That's our gift to you.

So check that out. That's really helpful. And you can look really smart in your business by having this calculator pulled up, put the numbers through it from your financial statements. That's why it's important to understand your financial statements and where the numbers are coming from.

And then you can spit out things and be like, look, here's our break even point. It's $3,256,128. And I know the four levers and price for every 1% we increase our price, we will increase our profit by 12.6%.

That's what these calculators will tell you.

But even better than that, if you want to grow your business, because I know a lot of you want to grow your business because you reach out to me and you tell me, so we have a blueprint.

It's called the four part Coltivar growth blueprint. And this is an amazing tool. It's totally free. You can get it at Coltivar.com. You can download it.

And there's one calculator in there that I love, and it will give you the sustainable growth rate of your business. In other words, it'll tell you at what rate you can grow your company without giving up additional equity or taking on more debt.

Super cool. It's all in that download. Be sure to check it out.

But these are tools that I would use if I was running a business or as in a management position, I'd be going into these tools, leveraging them left and right to increase my financial literacy. And like I said, it's all one place and it's totally free. So there you go. That's my gift to you.

Other than that, I think it's just practice. It's not being afraid to learn. It's getting into the financials, looking at these reports, practicing, asking questions, and just really trying.

You don't have to be a nerd doing debits and credits. You don't have to know the codification of the IRS tax law or whatever it may be. Just get the numbers, start practicing.

I know I talk really fast sometimes, but I just wanted to lay it out for you.

And here's the deal. I believe business is one of the greatest vehicles to generate wealth. You can put money in your 401k. You can try to save your way there, but the best way to generate wealth is going to be through business.

I don't like to tell people what they should do. Like you shouldn't do this or you should do that. Whatever it may be. I'm just giving you things that have worked for me and the people that I work with.

So if you could get really good at understanding the story behind the numbers and knowing how to take action, in other words, how to influence behavior, you're going to be a powerhouse because you will drive better results in your company and you'll be rewarded accordingly.

Okay. That's what I have for you.

What are your comments? What are your thoughts on this? Did I talk way too fast? Was this helpful?

What other types of topics would you like me to cover?

DM me on LinkedIn. I'm really active on LinkedIn. You can also leave me a comment down below in Spotify.

There's a little comment box. Just tell me what you're thinking. I love to hear from you. I always like to read the DMs from the community.

I'm so grateful for you. I'm so glad that you tune in. Check out those free resources as well. I'll leave the links down below in the description and I will see you in the next episode.

Cheers.