Hey guys! Greg Smargiassi here from OURCFO with another edition of Future Proof.
Today we're going to continue the discussion around the Canary Ratio and that is the difference between profit and cash flow. The item that we're going to cover today is debt reduction. Many businesses will borrow money from time to time to fund an acquisition of a business or maybe to fund equipment or other items that the business needs to operate. So of course when we borrow money from the bank, that money has to be paid back. So when you calculate profit, the profit calculation does not include the pay down of debt or debt reduction. So that comes after profit is calculated. And it's one of the reasons why that your profit and loss report will look like or will show you that your making profit but your cash position will be different.
So in relation to debt and debt structures is one of the areas that does need attention from time to time because sometimes your debt structures will be right for you and then as the business changes and as dynamics change, those debt structures may not be right for you. So it's a good idea to review your debt structures on an ongoing basis to make sure that it matches the dynamic of your business and is serving your business well. And some of the things that we find from time to time is that businesses will have equity built into the equipment that they have purchased so they've paid down debt faster than they may have needed to or just because they want to pay down quickly and there's equity tied up in some of your equipment.
So by reviewing your debt structures, sometimes we can find equity that's sitting in your equipment that you've got financed or even in your business that you have financed and you may be able to refinance that equipment to release some of that equity and put that back into cash flow for other purposes. So that's just one example of what you can do when you review your debt structures.
Really important thing to do on a regular basis. So we're coming to the end of our conversation around the difference of profit and cash flow. We've just got a couple more items to complete and then we'll do a wrap-up at end of month to get really clear on this phenomenon that occurs which is the difference between profit and cash. Greg Smargiassi signing off again with another edition of Future Proof.