Finance, from zero to fluent.
Learn the loop, then judge the numbers.
The language of a business
Money, value, profit and cash are four different things. Learn to keep them apart.
One loop. Three lenses. Five questions.
Every unit is a place in the loop, seen through one of the lenses, sharpening one of the questions.
- Raiseowners and lenders put money in
- Buymoney becomes people, stock and machines
- Sellcustomers promise to pay
- Collectpromises become cash
- Returnreinvest, repay, pay tax, distribute
- 1Stock or flow?2 units sharpen this
- 2Which clock?5 units sharpen this
- 3Whose claim?4 units sharpen this
- 4What is the bridge?8 units sharpen this
- 5What is the evidence?5 units sharpen this
Profit is not the whole picture.
Raise the spending on equipment. Watch cash fall while EBITDA stays put.
The earnings and cash bridge
Before you move a sliderPredict what more capex does to EBITDA and to free cash flow. Then check.
Buying equipment takes cash now; depreciation takes profit a little at a time over the years. EBITDA leaves out capex, working capital, interest and tax, so it is not cash available to owners.
Model assumptions and units
All amounts are made-up $000. D&A is shown separately and counted once. Nonoperating income is treated as ordinary cash income inside operating cash flow, not an asset-sale gain. Losses earn no tax benefit here. Free cash flow means operating cash flow minus capex.
Held fixed here: revenue $500, cost of sales, excluding d&a $200, other operating costs, excluding d&a $120, nonoperating income $0, interest expense $10, assumed income tax rate 25 %. The full experiment lets you change them.
Six stages. Twenty-four units.
Stage 1The loop and the three lenses
Meet the money loop and the three statements that watch it.
Stage 2Selling and spending
When a sale counts, what it cost, and how a machine becomes an expense.
Stage 3Funding and cash
Lenders, owners, and the cash hiding inside the profit.
Stage 4The rulebooks and the record
Book versus tax, the filings, and how to compare like with like.
Stage 5Diagnosis and value
Ratios, unit economics, forecasts and what a business is worth.
Stage 6Deals and verdicts
Combine businesses, take them apart, and defend a verdict.