#8 - Step 1 of The Financial Operating System: Identify Your WHY

Moderator  00:01
Welcome to the Empowering Healthy Business podcast, THE podcast for small business owners. Your host, Cal Wilder, has built and sold businesses of his own and he has helped hundreds of other small businesses. Whether it is improving sales, profitability and cash flow; building a sustainable, scalable and saleable business; reducing your stress level, achieving work life balance, or improving physical and emotional fitness, Cal and his guests are here to help you run a healthier business, and in turn, have a healthier life.

Cal Wilder  00:35
Welcome. The next few episodes of the empowering healthy business podcast will be dedicated to The Financial Operating System. 

Cal Wilder  00:44
So what is The Financial Operating System? It's a set of proven processes that I developed and validated over the last 20 plus years of real world experience helping small business owners manage the finances of their businesses. The objective is really to empower small business owners to take control over their finances, really understand how their business is performing, and then actively manage to improve the financial performance of their business. 

Cal Wilder  01:13
It's how I approached working as a fractional CFO with clients over the years. But it was all in my head. And that was limited in its usefulness obviously, is I can only work with so many clients. And it was not in my staff's brains, or at least not in any complete an organized structure. And it was not something that business owners had access to implement on their own in a do it yourself manner. So in 2020, the beginning of the pandemic, I published a book called The Financial Operating System. 

Cal Wilder  01:45
It's not an accounting book. Yes, there is a lot of accounting related to the financial operating system and running a business. But the financial operating system is really a process for business owners and their accounting staff and external advisors to ensure that the business is producing financial results that align with the financial objectives of the business owner or owners. It's a process for helping business owners get what they need and want from their businesses. 

Cal Wilder  02:12
Business owners take a lot of risk and endure a lot of stress. So their businesses need to pay off financially to justify all that. Otherwise, small business owners do just get a W-2 job and let somebody else deal with the risk in the stress. But they often become unemployable over time, as you know, who wants to hire somebody who's used to being their own boss. So at a certain point, getting a job may not even be an option. So business owners simply need their businesses to perform financially for them. 

Cal Wilder  02:44
This was all so important to me because I have seen far too many small business owners really struggling financially and not achieving their goals, the goals they had when they started the business, the vision for the business. The reality is turning out to be very different. 

Cal Wilder  03:04
People tend to assume small business owners are making a ton of money and living a great life. But the reality is very different for many, if not most of them. Too many small business owners are not making the money they hope to when they started their business. They don't know why. And they don't know what to do about it. And so the financial operating system is geared to help those people really understand the financial performance of their business, take control over their finances, make fully informed decisions and improve the profitability of the business. 

Cal Wilder  03:42
There are six steps to the financial operating system, and we will cover each step in a different episode. 

Cal Wilder  03:48
So today is step one. It is a short step. It's a simple step. But it's not necessarily an easy step. It requires introspection and reassessment. And we can't go any further in the financial operating system until we complete step one. 

Cal Wilder  04:07
Step one is to Identify Your WHY. Meaning, why are you in business? What do you kind of accomplish by owning your business over the next five or 10 years or more? 

Cal Wilder  04:19
For some people, maybe that's growing a big company early, optimizing for growth, and then worrying about optimizing for profitability later, maybe was trying to grow a business that is valuable enough, you can sell it for seven or eight figures or maybe even nine figures, meaning a million dollars or $10 million, or maybe even $100 million. Perhaps you're trying to optimize profit margins and take home compensation and not worry so much about growth. Some folks are trying to work fewer hours spending more time with kids or grandkids and their golf course or the fishing boat, but still take home the same money. Or perhaps you're trying to reinvent the company with the new In a business or development, sell the best new widget. And maybe that's the passion. And then some folks want to run a slow growing and steady, secure business that can be passed down to their children and retain it as a family business. 

Cal Wilder  05:15
All these are perfectly valid objectives. And they may have changed over time. If you owned the business for a while, your current objectives may be different than when you started the business. It may have been a long time since you've really thought through these things. So think about what you're trying to accomplish with the business while you're owning the business and what you want from it. 

Cal Wilder  05:40
And then, after you've reflected on that, you know, then we need to kind of gut check how we've been doing the last few years against those objectives. Maybe you don't have the best financial reporting yet, you need to implement the financial operating system for that. But you probably have a sense for how fast you've been growing or shrinking, how profitable or unprofitable you've been and how steady or chaotic the business has felt when you were operating it. So it's time to really gut check your objectives against recent performance. 

Cal Wilder  06:14
Maybe you're on your way, not quite where you want to be yet, but you feel like you're moving in the right direction. And you just need to make some incremental improvements, that's great. 

Cal Wilder  06:23
Or maybe you're just not at all on track. You have dreams and aspirations. But maybe there's a major disconnect between your actual performance in those dreams and objectives. And maybe that disconnect is persisted a number of years. And if so think about why that is something you know, may need to culturally change between you and your team. If your objective is to be, you know, aggressively growing the business, but revenue has been barely keeping up with place in over the last few years. Or if you're looking for 20% profit margins, but you've been more or less breaking even big disconnect there. So financial operating system is not a magic bullet. It's all about kind of incremental improvement, which can all add up over time to a dramatic transformation. But we're not going to go from no growth or breakeven to 25% annual growth and double digit profit margins and a quarter. And that may require a change in culture and attitude, and willingness to make certain kinds of decisions. 

Cal Wilder  07:29
Or maybe you don't know your numbers, because no one has ever laid them out to you in a way that you can digest and understand and use to make decisions. This is common, and this is what the financial operating system is geared to solve. 

Cal Wilder  07:44
Once you've gut-checked your recent performance against your objectives, the third thing we need to do in step one is to consider your business model. Now the business model is where strategy and operations come together. 

Cal Wilder  07:59
Maybe you're selling one-time projects and need a constant stream of new customers. Or maybe you sell monthly subscriptions and recurring revenue, and have mostly repeat customers, perhaps you're selling a high volume of low margin sales, or on the flip side, then you only make a few sales a year, but each one is very large and very profitable. Some businesses require a lot of capital investment in equipment and other hard assets that we've got to finance and then get a return on investment on. Or perhaps you've got an asset like service business requiring very little capital investment. Understanding the business model will help inform some of the decisions we make in future steps in the financial operating system. 

Cal Wilder  08:48
Before we go much further, we've got to really stop and reflect and complete step number one, where we're going to find our why, and gut-check of our performance against our objectives and making sure we're clear on what our current business model is. 

Cal Wilder  09:06
So until the next episode, when we tackle step number two of the financial operating system, you have some homework three things. Number one, write down your why when you own the business, what you're trying to accomplish from owning the business. Number two, write down your gut check of your recent financial performance against your wife, or at least very roughly and approximately if you don't have good financial reporting, do the best you can. And then number three, write down your business model. 

Cal Wilder  09:35
So next episode, we will proceed to step number two, which will be a deeper dive into how to assess your financial condition and your financial performance. So after step number two, you'll have a much better idea of how your business is performing financially than the basic gut check we're doing now in step number one. 

Cal Wilder  09:56
And as you proceed here, if you decide that studying up by implementing the financial operating yourself on your own is too daunting, certainly schedule a consultation with me. I can lead you through the process for your business and ultimately help you get more control over your business's financial performance.

Cal Wilder  10:17
Reference show notes and find other episodes on EmpoweringHealthyBusiness.com. If you would like to have a one-on-one discussion with me, or possibly engage SmartBooks to help with your business, you can reach me at Cal@EmpoweringHealthyBusiness.com or message me on LinkedIn where I am easy to find. Until next time, this is Empowering Healthy Business, the podcast for small business owners, signing off.