How To Manage Cash Flow Like Robert Kiyosaki
How to manage cash flow like Robert Kiyosaki
This is very important,
Small money you put into a business you must get Big money out
With this principle, you sell as high as the customer is glad to pay. The customer is happy, this is the key.
You give value and the customer sees this value, so he is pleased and eager to pay.
So small money that comes in, comes in from where? The Owner.
What does accountant call this money that the owner brings in? It is called CAPITAL.
Who else can take money into the business?
Bank? Who else? Financial companies? These group are called what? LENDER
Thus, the money going into your business, either comes from
1. The OWNER
2. The LENDER
When the lender puts in the money, we call it what? A Loan.
All money has a cost.
There is a cost even for the owner. That sort of cost is called? The owner is paid with, a DIVIDEND.
DIVIDEND is the cost of using the OWNER’S money.
Now, what is the cost of using other people’s money? It is the INTEREST, the cost of using other people’s money.
Let’s place in some numbers, let’s say if you put in $200,000 and your dividend is 15%.
SO now, how much does it cost you in one year, to spend the owners $200,000?
Now, the cost of capital is $30,000.
So, that is the cost of CAPITAL, and the cost of
using the money of the owner.
Let’s say you lend $100,000 and the interest is 10%.
The cost of using the lenders money LOAN is $10,000.
Here are some accounting terms that I want to introduce… this is what the accountant will state.
CAPITAL is $200,000
Loan is how much? $100,000.
Now, when the accountant says TOTAL CAPITAL EMPLOYED, how much would that be?
When Accountants say total capital employed, they consider LOAN CAPITAL and OWNERS CAPITAL (Equity Capital).
To them capital is, Meaning
EQUITY CAPITAL (Owners capital) $200,000
plus
LOAN CAPITAL (Lenders Capital) $100,000.
So how much is it? $300,000.
Therefore, in accounting terms,TOTAL CAPITAL EMPLOYED means the total money being used to establish a company.
Now you have another thing called the TOTAL COST OF CAPITAL.
How much will this be? $40,000
Why? (Owners Dividend) $30,000 plus (Lenders Interest) $10,000 equals $40,000.
Now I will present one more word, you’d likely use this a lot.
Weighted Average Cost of Capital. W.A.C.C.
If the DIVIDEND cost is 15% and the INTEREST cost is 10%.
What will be the weighted average cost?
How do we compute WEIGHTED AVERAGE COST Of CAPITAL?
Just take…
$40,000 (Total cost of capital)
Divided by
$300,000 (Total Capital Employed)
is equal to 13.3% (W.A.C.C)
So, what does that mean in cash management?
Which means that for small money to go in, big money must come out.
13.3% should be the minimum return capital.
Every INVESTMENT PROJECT should gain a MINIMUM return of 13.3% in other words, the profit divided by the investment must be a minimum of 13.3%.
That is why small money going in… big money coming out. This is the cash flow game.