Welcome And Chapter 2 Setup

SPEAKER_01 0:00

Welcome to the Financial Operating System series on the Empowering Healthy Business Podcast. I'm Lindsay and we are back with Calvin Wilder for Chapter 2 of the Financial Operating System. Last time we got deep into your why. Now it's time to face the music and look at where your business actually stands.

Why Cash Flow Kills Businesses

SPEAKER_01 0:17

Okay, so here's something to chew on. 82% of small businesses fail because of cash flow problems. Not profitability, not bad ideas, just cash flow. And today we're diving into why that happens and what you can do about it.

SPEAKER_02 0:31

That's such a staggering number. I mean, it's not even about whether the business idea is good or bad. It's literally about managing the money you already have. So where do we even start with this?

The Hard Look At Finances

SPEAKER_01 0:41

Well, it starts with something most people avoid for as long as possible. Taking a hard, honest look at their finances. It's what they call assessing your what, not where you want to go, but where you actually are right now. And let's be honest, it's not exactly the most fun thing to do.

SPEAKER_02 0:56

No, it's definitely not. It's like stepping on the scale after the holidays. You know it's going to be uncomfortable, but you can't make progress unless you know where you're starting

Condition Versus Performance

SPEAKER_02 1:05

from. So what does this what assessment actually involve?

SPEAKER_01 1:09

Why do you think that is?

SPEAKER_02 1:10

Oh, I like that analogy. So condition is what do I own, and performance is how am I doing? But here's the thing. Those two can tell completely different stories, right?

SPEAKER_00 1:21

Exactly. You could have a strong balance sheet with lots of cash saved up, but your profitability might be weak right now. Or the opposite. You're having a great profitable year, but your balance sheet is shaky because of decisions you made years ago. It's why you need both pictures to really understand what's going on.

When Cash Isn’t Really Yours

SPEAKER_02 1:39

That makes so much sense. And when they talked about financial condition, they asked some really tough questions like do you have a real cash cushion or are you barely scraping by every payroll? How much debt are you carrying? Are you reinvesting in the business? Or is the owner pulling most of the profit out? And the sneaky one, how much of your cash balance is actually already spoken for because you owe work to clients?

SPEAKER_01 2:03

So condition is what do I own? And performance is how am I doing?

SPEAKER_02 2:07

And then there's financial performance, the income statement side. That's where you get into the questions people probably expect. Is revenue growing or shrinking? What are your margins doing? Which customers or projects are actually profitable, and which ones are quietly dragging you down? How much are you spending to acquire a new customer versus what that customer is worth over time?

SPEAKER_01 2:33

Huh. So doing well this month doesn't necessarily mean you're financially healthy overall.

SPEAKER_02 2:38

Well, that's such an important distinction. They even mentioned how profitable companies can run out of cash, and it happens more often than people think. It's such a crucial point, but it's one that so many business owners miss.

SPEAKER_01 2:49

Let's start with financial condition, then the balance sheet snapshot. What are you actually looking for?

SPEAKER_02 2:55

And they didn't make it sound like a death sentence, which I think is really important. They said it's normal. Most small businesses start there. It's not embarrassing. It's just the starting point.

SPEAKER_01 3:06

Oh, that last one is sneaky. Your bank balance can look healthy and still not really be yours to spend.

SPEAKER_02 3:11

That last one sounds terrifying. But I appreciated that they didn't just leave it at this is bad. They said it's fixable, especially if you catch it early enough to have room to maneuver.

Fixing Messy Books And Finding Trends

SPEAKER_01 3:21

And then they went into the common problems they see when they start working with a new client. Things like bank accounts that haven't been reconciled, client deposits that aren't properly accounted for, a messy chart of accounts, payroll lumped into one expense line, and revenue and costs landing in different months.

SPEAKER_02 3:38

It's a lot of little things, but as they said, it all adds up to a big trust problem with your own numbers. And if you can't trust the numbers, you can't manage the business.

SPEAKER_01 3:47

Right. The business made money this year, and the business had cash this year can be two very different sentences.

SPEAKER_02 3:54

That was such an important point. QuickBooks can give you basic statements, but it doesn't automatically do proper accrual accounting or give you real insight. You need someone who knows what they're doing to make those adjusting entries and ensure the numbers are trustworthy.

What To Pull Next And Why

SPEAKER_01 4:07

So if someone's listening and thinking, I don't know which bucket I'm in, they gave some really actionable advice. Pull your balance sheet and profit and loss statement. Look at the trends over the last three to five years, and compare the last three months to the same three months last year. Then ask yourself, does this match the goals I set in step one? Where does it line up and where's the gap?

SPEAKER_02 4:26

And write it down. Because that's the input for step three. Defining your metrics and targets.

SPEAKER_01 4:32

Don't know is a bucket.

SPEAKER_02 4:33

And honestly, nervousness is a fine place to start. It means you're finally looking.

SPEAKER_01 4:39

Okay, and mediocre?

SPEAKER_02 4:40

Agreed. And I can't wait to see where they go with step three.