The Financial Cycle
I know, many of you out there are business owners or know people that are and you work through what we call the financial cycle. And you talk about balance sheets and profits and loss statements and all that sort of stuff, entrepreneurs have. But don’t tune out if you’re not a business owner because I want to take something, a very simple concept that’s very familiar to some people and relate that to some of the stuff that we’re seeing out there now in the markets. So this financial cycle, I want to talk about two of kind of these measuring sticks, if you will, that they have out there. First, basically a profit and loss statement. So what do you have? Basically, you know, you have your sales of whatever you have, sales minus cost of goods sold, minus your expenses is going to equal your profit, right. So then on the balance sheet side, you know, you’re going to have your assets is equal to your liabilities and your stakeholder/owner’s equity, right. So when you kind of visualize those two together, a good healthy company, you know, has good sales, they have reasonable expenses and they’re generating a profit. That profit can go one of three ways, right. It can go back up into buy more assets, inventory, stuff like that, right, new buildings, people, you know, all that sort of stuff. It can go pay debts, or it can go into the owners’ or shareholders’ pockets, right. So you can evenly do that. So a good, healthy company is probably doing all three. So if that cycle gets broken or if there’s challenges in that, you can see how easily that can break down and then profits can drop or you’re unable to pay debts or maybe you’re not paying a dividend or the owners aren’t getting paid anymore. So let’s look at this kind of in today’s world. Supply chain shortages, those are assets. Inventory would fall into that, right. So also when we have kind of our flow of our profit and loss, if we don’t have as much stuff to sell, potentially we are not able to generate as much profit which then we are not able to buy more assets or not able to pay down our debt or we are not being able to give as much back to the owners or shareholders. Interest rates rise, as we’ve maybe experienced recently, is interest rates rise it is. What does that mean? Your debt becomes more expensive. So even if you’re selling as much stuff or you’re generating as much profit, if that cost of that financing gets more expensive, maybe you’re not able to generate as much to do the other two things. Buy more assets or pay your owners their share, or put money in the shareholders’ pockets. So you can see, this financial cycle is vitally important to businesses and corporations across the world. So a good, healthy business is able to kind of keep this cycle going. And when you have these little interruptions along the way, supply chain issues, labor challenges, interest rates changes, you can see how potentially can affect that over the long term. If you’d like to talk about maybe your business or some future plans, give us a call. We’d love to sit down and talk with that here and help, so you can help build your retirement plan, whether you’re a business owner or not in the Northern Michigan area.