Step #2: Assessing Current Finances (Your WHAT) – Week #3 of The Financial Operating System®

Assessing current finances is a crucial step in understanding your business’s financial health. In Step #1 of The Financial Operating System, we clarified your objectives as a business owner. Now, in Step #2, we evaluate your current financial condition and financial performance to establish a clear baseline for decision-making, future planning, and ensuring your financial fitness aligns with your goals.

Assessing Your Financial Condition

The financial condition of a business is derived from the balance sheet, which captures assets, liabilities, and equity. A clear assessment of these components is essential for effective financial management.

Key Areas to Review

• Cash Reserves: Does the business have enough to handle unexpected expenses or payroll?
• Debt Levels: Evaluate lines of credit, credit card debt, and equipment leases.
• Equity Cushion: Assess retained earnings versus distributed profits.
• Days Sales Outstanding (DSO): How long it takes to collect receivables.
• Trade Capital: Cash tied up in payables and receivables.
• Future Obligations: Any portion of cash earmarked for deposits or deferred revenue.
• External Financing: Access to untapped credit lines or reliance on self-financing.

Assessing Your Financial Performance

The financial performance of a business is derived from the income statement (profit-and-loss statement), which highlights revenue trends, profitability, and key efficiency metrics.

Key Metrics to Examine

• Revenue Trends: Growth, stagnation, or decline.
• Profit Margins: Gross and operating profit trends over time.
• Labor Value Multiple (LVM): Revenue generated per dollar spent on labor.
• Customer/Project Profitability: Are certain customers or projects more profitable than others?
• Marketing ROI: How much is spent to acquire customers, and their lifetime value.
• Overhead Expenses: Percentage of revenue allocated to administrative costs.
• Free Cash Flow vs. Net Profit: Cash available for reinvestment compared to profits.

Financial Analysis Process

A structured analysis of financial trends helps businesses identify areas of strength and improvement.

• Review trends from the last 3-5 years and compare them to the same period in prior years.
• Factor in current-year forecasts for a long-term perspective.

Common Financial Scenarios

• Good: Strong cash reserves, no debt, high-profit margins, and consistent revenue growth.
• Mediocre: Limited reserves, modest profit margins, and stagnant profitability.
• Bad: Negative margins, heavy reliance on borrowing, and insufficient cash flow.
• Don’t Know: Poor financial reporting or bookkeeping prevents an accurate assessment.

Conclusion

Step #2: Assessing Current Finances creates a financial baseline, highlighting strengths, weaknesses, and areas for improvement. This assessment lays the groundwork for Step #3: Defining Metrics and Targets in the next phase of The Financial Operating System.

Next Step:

Business owners can self-implement The Financial Operating System. Chapters are available to download at smartbooks.com/resources or you can buy the whole book from Amazon (the marketing firm version or the general business version).

If you would like assistance with implementation or would like to accelerate results for your business, please contact author Cal Wilder at cwilder@smartbooks.com or book a free consultation with our team directly using this calendar link.