#9 - Step 2 of The Financial Operating System: Assess Your Current Finances

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  00:34
Welcome. This episode is the second of several episodes we're doing dedicated to the financial operating system. Last episode we tackled step number one, which is Identify Your WHY, we determined while you owned your business, what you were trying to accomplish through owning your business, you've got checked some recent financial performance against those objectives, and started defining your business model. 

Cal Wilder  01:03
In this episode, we're going to do a deeper dive into assessing your financial condition and your financial performance. Step two of the financial operating system is to Assess Your Current Finances. This is effectively the the WHAT you have. And then we'll see how the WHAT you have lines up against the WHY you have after we do our analysis. So after this episode, you'll have a much better sense for how to assess how your business is performing financially. We're not yet going to be at the stage of being able to actively manage it toward your financial objectives. But we will be much further along and the basic gut check we did in step one. 

Cal Wilder  01:41
When we assess your current finances, we look at three main accounting financial statements CPAs listening to this may point out there actually four official financial statements, but we're only going to worry about three of them. These are the income statement, also known as the p&l, the balance sheet, and the cash flow statement. And as business owners, we need to understand all three, because the financial statements tell a story, it's our job to figure out what that story is. So this podcast episode will be a little different than previous episodes, we're gonna be looking at some documents and reports together. 

Cal Wilder  02:22
To get the most out of this episode, you should pause the episode, go to the show notes and download the financial statement illustrations from the show notes. If you can't see them on your podcast player, go directly to EmpoweringHealthyBusiness.com Episode Nine and download them there. You want to have the illustrations in front of you as we talk through each of them. 

Cal Wilder  02:49
So let's get started. In the financial operating system, we differentiate between financial condition and financial performance. So performance is all about activity, generating revenue, you know spending money on expenses, generating profit and cash flow. And that's primarily reflected on the income statement or the p&l to some extent on the cash flow statement as well. So the example we're going to be looking at is a business that has grown its top line revenue 9% per year for the last three years. And we're looking at the resulting financial statements to see what what how we can assess the business's performance and condition. So 9% annual revenue growth over a few years is relatively healthy revenue growth is above average revenue growth. And we'll definitely get into the details of the full income statement. 

Cal Wilder  03:46
But before we dive into the details of income statement and assessing profitability, we're going to start with assessing financial condition. And this is really all about your balance sheet. And your balance sheet refers to where your business stands right now with assets and liabilities and equity, equity, also known as net worth, shareholder equity, owner's capital and book value. Until your balance sheet is a snapshot in time, whatever has happened since you started your business through today is reflected on your current balance sheet. It's the result of revenue and profit and cash flow. Most business owners fixate only on the income statement, the p&l. However, we're going to start with the balance sheet as that will give context into everything else. As we go we'll see that the three financial statements are definitely intertwined and it's hard to look at one without making some reference to the others. So hopefully you've downloaded the sample financial reports and we'll look at them now. 

Cal Wilder  04:57
The first thing we want to do is Look at the balance sheet. As I said, we want to start with that instead of the p&l. There are a couple of reasons. 

Cal Wilder  05:10
First, we want to make sure the accounting is accurate, because sins of bookkeeping and accounting tend to accumulate on the balance sheet. While the p&l might be off a little bit every month, those inaccuracies can accumulate into much larger amounts month after month on the balance sheet. Complicating this, as business owners tend to focus on the p&l and may not even look at or study the balance sheet. So you might not even realize you have a problem there. So as part of the balance sheet review, we really want to make sure that the balance sheet is accurate. So there's some due diligence we could do on on the accounting front. But we're gonna assume for the sake of argument that the balance sheet we're looking at yours is accurate that you've, you've validated the accounts receivable aging report, that's, you know, a list of open unpaid customer invoices with columns, typically representing zero to 30 days, 31 to 60 days, 61 to 90 days and over 90 days of being outstanding and unpaid. And so, if we're not actively managing and writing off uncollectible invoices, we could end up with a balance sheet that has a whole lot of our receivables that are more than 90 days outstanding that are never going to be paid. So we couldn't be overstating revenue that way. And there's some other accounts, like prepaid expense, accrued expense, customer deposits, deferred revenue that sometimes are important to be used for accurate accrual accounting. However, certain certain bookkeepers or accountants who are a little bit less skilled or diligent may have a habit of booking things to those balance sheet accounts, and then never reconciling the account and not maintaining a detailed schedule to explain what created the balance that's in that account. 

Cal Wilder  07:11
The second reason I want to start with the balance sheet is it shows the capitalization of the business, meaning how you financed the business with debt, and maybe equity, what distributions or dividends have been paid out, and what we've got left for net worth in cash reserve. So when we look at the balance sheet, we want to understand how it's structured. So there really are kind of five segments to the balance sheet. We have our current assets, our long term assets or other assets, we have our current liabilities, we have other liabilities, and we have equity. So when we're eyeballing the balance sheet, we want to get a sense for is there debt, meaning lines of credit, notes payable other Bogar or borrowings to finance operations or the purchase of assets? And if there is debt, then is it increasing or decreasing? Is their retained earnings is down in the equity section? So is the is the business distributing out all of its profit to owners? Or is it building up some net equity in the business that usually is translated into a cash reserve in the business, we can look at our debt to equity ratio to see you know how much debt the business is taking on compared to its equity, its net worth and if that's going up or down over time, you know, if a business is in the minority of those business models, where it collects advance payments from customers or otherwise gets paid by customers before and has to pay its own expenses, then it may be able to operate without as much of a cash balance and as much of an equity cushion. But it could be vulnerable to changes in business practices, if those advanced payments, you know, stop. And so kind of generally what we look for, but let's dig into some of the details here and really study this example of a balance sheet. 

Cal Wilder  09:08
The structure of the balance sheet will start with assets at the top as of December 31 year end periods for the last four years. Cash is at the top, pretty straightforward cash in the bank. Then we have accounts receivable money that customers owe you. And then we have other current assets that could be prepaid expenses or, you know, deposits on an office lease or something like that. And then we have, you know, total of all kinds of current assets, which reflect the amount of these assets that we expect to receive within the next 12 months. And then we have fixed assets and any other long term assets below there and they all add up to the total assets of the business.

Cal Wilder  10:03
Then moving down, we get to the liability section, there's almost always an accounts payable account. There's usually credit card payable. And then there's some other current liabilities that could be accrued expenses or customer deposit or something like that. And again, all these balances that we expect to have to pay within the next 12 months are considered current liabilities. Below there, we have our long term liabilities, which in this example, are notes payable, you add it all up, and those are the liabilities. 

Cal Wilder  10:34
Because balance sheets have to balance by definition, the difference between total assets and total liabilities equals owner's equity. There's usually some capital invested when the business was formed, or maybe over time, it just an old capital was invested in equity. So we see that, over time, this company made some significant distributions to its owners. And then it retained some profit, net income and retained earnings in the business. And we add all those up, and we get our total equity. 

Cal Wilder  11:10
When we're looking at a balance sheet, kind of want to get a sense for what's the capitalization like? Is there debt, meaning lines of credit, notes payable, or other borrowings to finance the purchase of assets, or finance operations? And what's going on with that? Is it increasing or decreasing. So in this case, our accounts payable, not really financial debt, but it is a liability that needs to be paid, it's relatively consistent. Credit cards have grown a little bit as the business grew, but pretty consistent. And same with other current liabilities. So those are really sources of financing per se. But if one of them was going up dramatically, perhaps the credit card went from being paid off every month to being a source of longer term financing. So we want to identify that.

Cal Wilder  12:00
We get down to notes payable, and we see that our notes payable started out at 100,000. And then it's crept up as now 150,000. So our notes payable increased by 50%, over this period of time. So we want to make a note of that. 

Cal Wilder  12:18
Then we want to look at what do we have for owner's equity, the net worth of the business. And we can see that it's actually gone down slightly over the course of these three to four years. And so that's interesting. We want to analyze that a little bit more. Because there's the business, although it's been growing 9% a year, its net worth, its equity has not increased, it's actually gone down an average of 2% a year over these few years. 

Cal Wilder  12:52
We can look at some ratios to help us understand, for example, the debt to equity ratio for businesses that have debt gives us a sense for how much debt is there compared to equity. So we take our debt, and we divide it into our equity. And we start out at point three, and then as the equity stays relatively flat and notes payable increase, then we end this analysis at point five, so it may not seem like a big increase. But you know, that's that's about a 60 or 70% increase in debt to equity ratio. 

Cal Wilder  13:38
Let's circle back here to cash. Because we know this business has been growing revenue at 9% a year for the last three years. So we might think that's good. Maybe cash and net worth have also increased 9%. But when we look at the balance sheet, it tells us a different story. Cash is at the top of the balance sheet, although really changes in cash are really the outcome of activities in other accounts on the balance sheet. So cash is going down down an average of 20% a year for the last few years. So why is that? So balance sheets, as I say, balance sheets need to balance by nature. And so cash is kind of the output of changes in other assets and liabilities. So this example is a relatively short simple balance sheet and we can spot the primary issues without having to consult the cash flow statement. 

Cal Wilder  14:43
Accounts receivable increased in dollar terms 18% a year. And if we do some review, our metrics are days sales outstanding, representing how many days of revenue are outstanding as accounts receivable that have not yet been paid? by customers, you know, we went from 41 to 51 looks, you know, is a significant increase of about 25%. And so our accounts receivable will have been growing. So that's really depressing cash because we haven't collected the cash yet, we're still owed by customers. And as the business grows, customers owe us more and more money every year. 

Cal Wilder  15:27
The other thing we notice that changed, a lot of these accounts didn't change too significantly, plus or minus a couple or a few percent a year, except we get down to looking at owner distributions, and we can see in Row 21, distributions to owners have been quite significant. And if we compare the annual net income to distributions, we can see, aside from the first year, in which they left some of the profit in the business to the tune of almost 100,000, every year since then they have been distributing basically all if not a little more of the profit to owners, and not leaving in the business to build up a cash reserve and net equity in the business. So those are the two main factors that drove cash. Receivables went up and consumed more and more cash waiting receipt. And the owners paid out all the reported profit, even the uncollected portion of it, as distributions. That tells the story, just like if we looked on the cash flow statement, it would tell the story as well. 

Cal Wilder  16:49
Ask ourselves if accounts receivable went up; and the owners were paying themselves out slightly more than the annual profit, including the uncollected portions, how can the business afford to pay out all its profit as distributions. The only way to really do that is to borrow. This company effectively borrowed to help fund those distributions. If we look at our notes payable line, it went from 100,000 at the beginning to 150,000 at the end, so 50,000 of those distributions were effectively borrowed from notes payable. So cash has gotten a lot tighter, cash is down, almost in half, from where it was at the beginning. 

Cal Wilder  17:45
If we start to look at some ratios, it gives us a little more color commentary on that. Our cash balance is a multiple of monthly operating expenses was pretty healthy 1.4 times at the beginning, meaning we had 1.4 times our monthly operating expenses as cash in the bank and never had to worry about making payroll or were getting on payment plans with vendors just afford to pay everything we do. Now, at the end of the period, we're down to 0.5x. Typically, when we get less than one, it starts to introduce a lot of stress and wasted energy and money to figure out how to pay bills and manage cash flow, instead of doing things that are going to drive revenue and quality and customer satisfaction and retention and profit for the business. 

Cal Wilder  18:36
Another thing we can look at is our debt to equity ratio. That reflects how much debt the business is carrying divided into its equity. How much of the net worth amount is reflected in borrowing to financial debt. So, we know the net equity is relatively flat actually down slightly over this period. And our debt went up from 100,000 to 150,000. So naturally, our debt to equity ratio went from 0.34 at the beginning to 0.53 at the end. That may not seem like a lot, but it's a 60% increase in debt relative to equity in the business. I think you can see from this example, what looks like a nice business growing 9% a year actually has some serious financial issues to resolve. 

Cal Wilder  19:32
Okay, moving on to the income statement to start to look at financial performance. Before we look at an example with actual numbers for three or four years, let's talk about the segmentation or the you know, the structure of the different parts of the income statement. We've got our revenue, which I think we're familiar with all the sales of the business Then we have our cost of goods sold below that which represents, you know, third party hard costs, you know, the cost of inventory, the cost of, you know, potentially delivering products. These are this is not labor, though, unless there's some subcontract service provider vendors, this might include some of their labor. But this is not including any of your payroll cost. It's just third party hard costs of goods that are sold as part of revenue, then we get our gross margin difference revenue minus cogs, and what the gross margin percentage of revenue. That's pretty straightforward. 

Cal Wilder  20:43
Then want to talk about the labor cost and the ost of services to deliver that revenue. This is typically payroll. And there may be a few other service related costs in there too. It's not the total payroll of the business. This is just the payroll of the of the employees who are directly delivering the revenue. This isn't the sales and marketing team, this isn't the office manager and the CEO, it's only people who are directly delivering the revenue. So we're gonna introduce a term here that QuickBooks doesn't have any concept of QuickBooks considers both cost of goods sold and direct service costs typically both to be in the cogs segment. But we'd like to break it out so that we can look at contribution margin, which is the profit of the business generated by delivering the revenue before factoring in the cost of acquiring the customers and the administrative overhead of managing the business. Wee look at contribution margin as a percentage of revenue. Contribution margin is gross profit minus direct service cost. And then from there, we can get into some other metrics that become very interesting, as well. Ultimately, we can set some benchmarks here on what the contribution margin needs to be in order to have reasonable budgets for marketing and sales and G&A and have some operating profit leftover. 

Cal Wilder  22:13
Moving down, we've got our marketing and sales expense segment, which we can express as a percentage of revenue, just for the folks whose primary job is bringing in customers. If customer account management as part of the sales function, then maybe you've got customers and customer service related type payroll here with the customer service has very little to do with bringing in the customers. And it has a lot more to do with delivering the service than we want those people up here indirect service costs. 

Cal Wilder  22:45
Then below marketing and sales, we've got our general and administrative expense. This can be general office rent and utilities, the officer salaries, insurance, things like that. You can express that as a percentage of revenue. And now we get down to our operating profit: revenue minus cogs minus direct service cost minus marketing and sales minus G&A leaves us with the operating profit of the business expressed as an operating margin percentage of revenue. There may be below the line, so to speak, below the operating profit line, some other income and expense. It's commonly interest expense and income tax expense if the business has corporate-level income tax to pay. That would yield our net profit at the bottom with a net margin percentage of revenue. 

Cal Wilder  23:42
This kind of structure allows us to really get better insight into the different cost centers and profit drivers in the business and can lead to some metrics that we'll cover in future steps to the financial operating system. Every business may have slightly different characteristics and cost structures and some industries are different than others. But ultimately, this model gets us to target margins in different lines here. We can figure out if we're trying to get to a 10% or 15% operating margin, what are the implications for marketing and sales and G&A and what kind of contribution margin we need to produce that. It has implications on staffing and utilization, pricing, and all that good stuff. We assume most of the audience here are owners of service or technology businesses, and again, if your focus is real estate investing or some kinds of manufacturing, it's going to be a lightly different model. 

Cal Wilder  24:49
One note here I want to make relates to owner compensation, accounting for owner compensation for owners who work as employees in their business. There's a cost to that. If the owner didn't do it, the business would have to hire somebody else to do it. And so we want to make sure that owner compensation at a level that's relatively close to market, if the business had to go hire a replacement for that role, is in the income statement counted as an expense in the P&L. There's a section in the financial operating system book that goes into a lot more detail. But just note that for know whether your salary, or if your partnership or an LLC, maybe you have drawers owner draw that functions like salary. And s-corp distributions, that's not salary, but you need to make sure there's some reasonable W-2 compensation going through as an expense on the P&L. So just make a note whether owner salaries and draws are listed as an operating expense on the P&L. Because if they're not, then the profit could be way overstated, and you think you're running a very profitable business, but might not might not be profitable, if we don't have a cost in there for all the employees who are doing the work. 

Cal Wilder  26:08
Alright, so that's the structure. Let's look at an example here. So I like to look, when I'm doing an assessment of financial performance over the course of a few years, three to five years just to get a sense for what the trends are for revenue and profit margins. Now, ideally, the accounting policies and procedures have been consistent over those years. Otherwise, it's going to be hard to compare year to year, and we might be stuck just looking at, you know, top line revenue change over time and bottom line operating profit or net profit change over time. The accounting policies for the other segments have changed over time, but no, 

Cal Wilder  26:54
We want to know is your revenue growing or shrinking and at what rate, so we can see in this example, the compound annual growth rate of is 9%. We went from 2.4 million to 3.15 million. 

Cal Wilder  27:07
I want to look at trends and margin components. So we can see that the gross margin is trending down over time. That's not good. Meaning revenue has been growing 9%, but our COGS are growing 18%. So our gross profit is only growing at 5% 9%. 

Cal Wilder  27:29
Then, a similar analysis for what's going on with contribution margin, and our direct service costs. So in this case, our direct service cost is growing at 7%. So that's good, costs are growing a little bit less than revenue. And so that allows us to protect the contribution margin a little bit, even though gross profit is down significantly.

Cal Wilder  27:56
Then we move down into marketing and sales can see it's pretty consistent at 13% of revenue over time. So marketing and sales expenses are growing at the same rate that revenue has been growing. 

Cal Wilder  28:09
General and administrative expense, though, has been inching up. The net impact of 1% or 2% a year is 16%, going from 17% of revenue to 20% of revenue. If revenue has been growing too, so not only would it be 17%, for all four years, it would have gone up, the 9%. But because as a percentage of revenue went from 17% to 20%, compound annual growth rate of G&A expense was 16%. So, we've let the the overhead get a little bit bloated. In this example, we're growing revenue 9%, but our G&A overhead went up 16%.

Cal Wilder  28:53
There's pros and cons as we go down the income statement and do some basic margin analysis. We get down and see what the impact is at the bottom on operating profit. And in this case, we went from $264,000 of operating profit with an operating margin of 11% of revenue to an operating profit of 63,000. So we lost you know, $200,000 of profit dollars, and our margin went from 11% to 2%. So, you know, the impact of the decline in gross profit margin and the increase in G&A expenses as percentage of revenue has ended up crushing the operating profit of the business. Bottom line is operating profit was 76% less in dollar terms after three years. Three years ago, the business was 25% less revenue, so it's a smaller business, but it was a heck of a lot more profitable. So this gives us a lay of the land for assessing medium term trends with the business over the course of a few years, you can export what QuickBooks calls the Profit and Loss report and add some of this analysis to it and see how your business is stacking up. 

Cal Wilder  30:18
We tend to want to look at more shorter term analysis to figure out what's going on, you know, this year, the last few months, what's their more recent performance. And so for that, we can do a different view where we can look at now one month this year versus the previous year. The trailing three months this year versus the same three months a year ago, maybe we could do a year to date year over year, if we wanted to, I don't think that's as mandatory. I really care a lot about trailing three months and trailing 12 months. Anything can happen in a single month-- we need to know what happened in the month and why it happened-- but small businesses can be volatile. Something particularly good or particularly bad happened in any given month, and looking at a trailing 3 month and a trailing 12 month gives us more accurate context to do the analysis and understand what's going on. I'm not going to go through this particular sheet, but if you want to do the same kind of analysis of your business, this is the kind of format that that you could use. 

Cal Wilder  31:30
Okay, now we've looked at the balance sheet, we've looked at the income statement, now we're gonna look at the third financial statement, which is the cash flow statement. Now, the cash flow statement really ties together the income statement and the balance sheet and shows you what's driving your actual cash in the bank, up or down. It's more meaningful than, just the pure cash basis income statement, because it also includes activities that don't appear on the income statement. And so we can look at what some of those are. Word of warning: cash flow statements can be challenging to interpret until you get familiar with it. So we'll go through the structure of it. And then look at some of the details here. 

Cal Wilder  32:20
There's three sections. The top section would be net cash provided from operating activities. That's cash from actually operating the business. Then we have a section for net cash provided from investing activities, or consumed in investing activities the likely case if we're buying fixed assets or other kinds of assets that can be consuming cash. And then the bottom section is financing activities, which reflects how we're capitalizing the business with debt and equity and paying distributions. Raising more capital from sales and equity, things like that go down in the financing section. 

Cal Wilder  33:04
So those are the three sections that show you know, the different areas, different ways the business is providing cash or consuming cash, when we get to the very bottom, and we can see the net change in cash for the period is the sum of the other three sections. 

Cal Wilder  33:23
The key for most businesses is going to be something's really driving cash that needs to be managed by metrics and scorecards and active management is the operating activities section. Really, it tells us, we reported so much net income on the income statement, how much cash did those operations actually producing the period. And so you can also do a trailing three month, trailing 12 month or one month analysis of the cash flow statement, but they're all laid out the same way. 

Cal Wilder  34:11
In this example, the business has the net income we saw on the income statement. And then if you remember from looking at the balance sheet, our accounts receivable was growing. And so we have these negative numbers in the cash flow statement. And when we have negative numbers in the cash flow statement, it means that this area consists produced less cash than was reported as net income on the income statement. Put another way, a negative number represents something that is consuming cash. So when accounts receivable goes up, that's less cash that we're collecting from those customers and the more accounts receivable we need, you know, Since we haven't collected the cash, we need to finance the associated operations with cash that we get somewhere else. So negative numbers typically represent something to worry about, especially if they're large negative numbers on the cash flow statement in the operating activities section. So we've kind of go through each of the segments of the balance sheet here, as we go down, and we see whether those segments of the balance sheet contributed cash, or consumed cash. So remember, other current assets on the balance sheet did not change very much over this period of time, you know, two or $3,000 a year. So we look at the cash flow statement. You know, we see other current assets, you know, consuming two or $3,000 of cash for the year. And then the final thing before we get to liabilities is we always see depreciation line in the cash flow statement, because depreciation is an expense on the income statement, but it's a non cash expense, we paid for the equipment upfront, and we're depreciating it over some number of years. And that depreciation is an expense on the p&l, but it's a non cash expense. So it's really contributing cash or causing cash flow to be a little bit better than reported net income by the amount of the depreciation expense. Then we look at the three liability segments on the balance sheet, accounts payable, credit cards payable and other current liabilities, which didn't change very much, if we add up all these things, and it gets us our net cash provided from operating activities. 

Cal Wilder  36:41
What we really would like to see is net cash from operations that is about the same as net income. It would be great if it would be higher than net income if we're collecting large advance payments from customers, and that's contributing a lot of cash and collecting receivables immediately upon an order, then we could have net cash from operations that is larger than reported net income. But consider yourself lucky if that's the case in your business, because it's usually not the case. If we can convert 80 or 90% of accrual basis net income into cash from operations while we're growing the business at some significant annual percentage, that's a win. 

Cal Wilder  37:27
All right, then we move down the investing activities. We bought 10,000, a year of fixed assets. So that's a negative 10,000 consuming cash. If you remember, the balance on the notes payable went up by 50,000, over the three years. We can see that here. We didn't raise any capital, didn't have any capital contributed from owners, and we had sizable distributions to owners. So our net cash from financing activities here is a negative number. So we're pulling cash out of business. 

Cal Wilder  38:07
Let's look at some ratios here. We know cash went down a lot, but look at some ratios that can help us understand that, why why that was. We can see cash from operations as a percentage of net income had been in the 70% range and then dropped to the 50% range over these years. So that means we're only converting 50% to 70% of net income into cash from operations. Where's the rest of it going? Well, a lot of what's going into financing larger accounts receivable.

Cal Wilder  38:45
The other metric that's illustrative here is owner distributions as a percentage of net income. So what percent of the reported net income is being distributed to owners? It's about 100%. And actually, we added it up over the course of these three years, the business distributed slightly more than 100% of its reported net income, and this is accrual basis, net income, not cash basis. So the net income includes profit on revenue that has to be collected in cash from customers. So how can the business afford to pay out a little more than its net income, a little more than 100% of its net income? Well, typically it's borrowing from somewhere. In this case, it's issuing more notes payable. Other companies might stretch accounts payable and be slower to pay their vendors. We've got to come from somewhere though, because balance sheets balance. 

Cal Wilder  39:42
I hope you enjoyed this introduction to assessing your current finances, your financial position on the balance sheet, your financial performance on your income statement and cash flow, and have a better sense going forward how you approach doing this kind of assessment for your business. Until the next episode, when we tackle Step Three of The Financial Operating System, you've got some homework to do. I want you to run these financial statements out of QuickBooks or whatever accounting software you use. Also run the AR- accounts receivable- and accounts payable aging schedules to check out the accuracy of what's being carried on the books as receivables or payables. If you've got other significant balance sheet accounts for things like prepaid expenses, deferred revenue, accrued expenses, payroll liabilities, if you have accounts like that on your balance sheet, get some details. If you do the books yourself, figure out if that balance is accurate. How do you get these numbers into those accounts? How can we validate those against some third party statements for accuracy. Or if you've got a bookkeeper or accountant, they should maintain what we call balance sheet schedules that detail out what activity has happened in those balance sheet accounts to validate that the number on the balance sheet at the end of the period is accurate. And then try to do the same analysis that we just went through with your numbers. Remember, Step One of The Financial Operating System? Your WHY. Pull out your notes for last episode. What kind of financial performance did you want to be getting from your business? Okay, now we can compare actual results against those objectives. How close are doing? What were the primary variances that you can highlight on your financial statements that may be at odds with your financial performance objectives. 

Cal Wilder  41:45
The next episode, we'll proceed to Step number three, which will be a deeper dive into defining goals and metrics for your business. We'll take the results of steps one and two. And we'll determine a set of metrics you can track along with associated goals for those metrics that will help you steer your business toward your financial objectives. 

Cal Wilder  42:07
If studying and implementing the financial operating system, and doing this kind of analysis is is too daunting to do on your own or you've got better things to do with your time, you can schedule a consultation with me. I can lead you through the process for your business and help you get more control over your business's financial performance. 

Cal Wilder  42:27
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.