Business Innovators Radio - How to Diagnose and Fix Your Business Before It Breaks

Episode Date: April 21, 2026

Philip Lorenzo walks through four critical checkpoints every operator, founder, and team leader should focus on to build a more structured, profitable business. Instead of operating in constant reaction mode, this episode reframes your business as a system – giving you a clear way to assess what’s working, what’s not, and what needs to change.From auditing your balance sheet and understanding your true cash position, to breaking down your P&L for growth vs. profitability decisions, this episode dives into the financial foundations most teams overlook. It also covers how to evaluate your subscriptions, payment terms, and cost structure, so you’re not leaking cash without realizing it. Tune in to hear more!Fractal Focushttps://businessinnovatorsradio.com/fractal-focus/Source: https://businessinnovatorsradio.com/how-to-diagnose-and-fix-your-business-before-it-breaks

Welcome to fractal focus, the podcast where innovation meets entrepreneurship. Hi again, it's Philip Lorenzo with fractal focus. And boy, do we take a break. Not going to sugarcoat it, we took quite a break. There is a lot going on in fractal, and there is a lot going on in the individual businesses that are a part of fractal group. For context, this episode will only be me talking about how you can, make 2026 a really good year for your business and a really good year for your clarity and your purpose. Your resolutions are either in full effect or they've been fading a bit. And today we want to

talk about four different critical checkpoints that will get you completely clear and hopefully profitable or growing in 2026. You know, Q1 for me is a lot of. You know, Q1 for me is a lot of lot of times a frazzled, you know, experience. January is after the holiday. You're not quite getting responses from clients like you usually do. People are still kind of getting off of the holiday experience. They don't log on immediately in the morning. And maybe there are still lingering colds and flus and other illnesses that affect the team. And I think for us, especially in one of the companies that are run infractal. What I experienced in January is a mix of excitement for the new year, is a mix of knowing that we have more opportunity to grow, but then also at the same time,

it's this period of, I don't want to say uncertainty, but a lot of variables that you didn't expect. And especially if you're running a cash flow, January can be interesting because sometimes invoices don't resolve as quickly as they do before the holiday. And so all those things considered, I think that Q1 becomes this place of you're treading on water, your inbox is completely overflowing, and you're kind of recovering and still trying to get all your tasks done and get going. And maybe you're working a few more days than you usually do.

Maybe you're working more Saturdays. Maybe you're working more Sundays to ensure that you're going to have a profitable or at least a stable January if your fiscal year runs in a calendar year. But now let's look at why Q1 should be looked as a diagnostic quarter. Essentially, you're trying to figure out what happened the year before. You're trying to assess what mistakes you made the year before and how you want to, of course, learn from them for the new year, but also it serves as a nice foundation for what is possible. And so if you look at it that way, it becomes more encouraging to do this work as opposed to scary or frightening or scary and frightening and all the different emotional syntax that we

can come up with when it comes to looking at what happened last year. So I'd like to start with the balance sheet. The balance sheet is important because it tells you what is. It tells you what your business is right now at this moment. You have a very clear idea of all your assets, your liabilities, and you know what your cash position is. So when you look at your balance sheet, think about the audit that you're going to do. And that could be you as an operator.

So this is specific for any COOs or any director of operatives. or any bookkeepers or any accountants or anybody else that works in the operation side of any business. You want to look at the balance sheet and when you're auditing it, what you want to start looking at is your aging receivables. You want to take a look at 30, 60, and 90 days. You want to see how those receivables are being resolved and you want to see what your DSO looks like. This is important because you want to ensure, again, you're in a good cash position, but also you have the runway you need to be able to operate and to be able to continue operating.

The other thing you want to look at that in your balance sheet is, any mistakes, any miscategorized line items. You don't want any surprises to hit, especially if you're trying to do things operationally like maybe you're applying for a new line of credit or maybe you are wanting to switch banks or maybe you're looking to be prepared for a potential exit. This is definitely an opportunity to audit your balance sheet and to make sure that it is clean, categorized correctly, and it has a very good picture of where you are right now. So it's not like a P&L.

P&L, of course, is what happened. Balance sheet is what's happening. Now, on the liability side, you want to make sure to check for any surprises. You want to look at your debt obligations, and you want to look at expenses that need to be addressed. And this is especially true if there's expenses that somehow blindsided you in some way, which happens to every business, especially if you're not monitoring your cash flow on a daily basis. So look at your balance sheet. Make sure you have a clear picture of all your assets and they're accurate. check your inventory as well. So if you have inventory, and this is true for any services business,

any agency business, any business that you, you know, when we think about inventory, you could think about, okay, if you have a furniture store, of course, you want to see which your furniture is. Or if you have a grocery store, if you have a coffee shop, you want to do a proper inventory, everything you have. But you also, as a services business, probably have machines, computers that you have purchased for your employees, and you have other items that you have purchased that is considered inventory. So make sure that inventory is accurate.

And also important, if you're carrying anything that is a debt asset, so if you are carrying machines that aren't being used at the moment, can be sold and converted to cash, do that. Or if you have new opportunities for employees and you want to recycle those machines,

into those resources, then do that. But make sure you're checking for anything that has been left to collect mothballs or dust bunnies. Hmm. Anyway. Now, that is your balance sheet. Some action items you can do, some things you can set aside. If you have a CFO on your team, set aside a war room time.

That's what we call them here, war rooms. Or set aside a time. At least two hours, it can be more than that so that you can block off some time to profit. properly review your balance sheet. Run your aging report on receivables, identify any top concerns in your balance sheet, and then create an action plan that should not go beyond Q1. Really important. Make sure that whatever action plan you decide on is not extended beyond.

You should 30 days is a good enough time frame, maybe 60 days. But do not let it carry over too long. So you took a look at your balance sheet and you're like, Like, okay, I'm in a pretty good, you know, feel pretty good about myself. But now we have taxes coming up. And now we also have to look at your PNLs. So follow your money, or as you want to call it maybe a cash reality check. So cash P&Ls and accrual PNLs are both important.

Cash PNLs is what actually moves in and out of your bank account. This is what actually goes into your business and what goes out of your business. this is the operational reality of where you are because there's no more IOUs, right? You don't have an IOU in business that much, do you? Like maybe some businesses, I don't know, but I certainly know in ours we don't have IOUs. We have to be able to pay bills. And you can't do that with accrued revenue. Now, certainly, you can get lines of credit based on your accrued revenue.

And as long as you have good credit scores and as long as you've, really done a good job of paying your bills in the past. Certainly you can ask for a line of credit, but that's still a line of credit. So make sure you look at your cash penal. Also, your cash penal is important to help you with your taxes and help you understand, again, what moved in and out of your bank account in actual cash. That's important. Now, when you're scrubbing your cash P&L, again, we're going back to what we saw in our balance sheet review and we see in general, which is like really reviewing your receivables. And the core thing you want to hit on is when do you actually get paid versus when you invoice your DSO?

And really take a look and be honest about are your payment terms really good? Are they good for your business? Do your payment terms actually fit within the cycles you need to resolve bills to make payroll? So example, 60 day terms. Let's say you run out of a business with 60 day terms. Is that good enough? Are you doing enough volume of cash that 60 day terms will do just fine still? Or worse, are 60 day terms actually hurting you and actually affecting your business in a really

terrible way? And this could be a time to revisit your payment terms and say, hey, we need to actually decrease the payment terms. We need to make them 30 days, 45 days, 30 days, or even 15 days. Again, this is really important. That's why you have to do a full cash penal analysis. Look at your balance sheet. Check your bank accounts. See where you are, right? And so a cash panel will do that for you. You also want to look at your expense timing. And that goes a little bit back to talking about your payment terms, like what is really affecting your business. So, Expense time is important, and you want to look at when you get those large expenses,

right? Your insurance renewals, your business license renewals, your taxes, your subscriptions to big parts of your company's infrastructure. So all those massive expenses, you can average them out if you'd like on your P&L, certainly to maybe make the months look better. but I think it's more important for you to, on a cash basis, ensure that your timing your expenses in a way that's accurate so that you know exactly when those hard expenses are going to hit your accounts and when they're going to hit your business. So it's really important to look at when you have large irregular expenses. It's also a good time to see all your subscriptions as a business.

Businesses accumulate a lot of subscriptions, especially as teams accumulate in a business. So the more teams you have in a business, the more potential there is for either redundant subscriptions or just more subscriptions, period. But this is a good time to audit those. And it's a good time to see what you're paying for and what you don't use. And it's no different than your personal expenses. Like if you were to think about your personal financial review that you should also do in the beginning of the year, you should take a look at the subscriptions that you have.

and you should see what you don't really use. And this is an important exercise, and you really have to be honest about what you're not using. And not just what you're not using, but what you're not using effectively. So could a product that you subscribe to benefit from just one primary user for the whole company or one primary user for the whole team? If you do this, will it affect other people's ability to use the product? So sometimes if you try to use one account, one person logs in, and then another person tries

to use the product, and then they log in, and then that other person gets logged out, and that's a whole mess. So is that going to be practical for that particular product? Or will it work? Will you be able to use one account for all your usage in the team? And I think that's really key. It's really key to think about your subscriptions and how you're using them. your vendor payment terms. This is a little bit in lockstep with your subscription audits,

but just about timing, really, more than anything else. Are you optimizing the timing for your payment terms to your vendors? Are you looking for opportunities to pull those payments into a period that is more beneficial for you on a cash basis? So, example, you don't want to have a lot of vendor payment terms hit on the same day, your payroll. That's a huge one. So unless you are swimming in cash where you can afford to pay everything on one day, you are going to have to plan appropriately to make sure you can make payroll and then find days where you have cash recovery so that you can go ahead and resolve your vendors. And as always, ask your vendors for flexible payment options if necessary. But a lot

of times it's just about timing. It's just about, hey, when can I pay this vendor? Can I negotiate a different payment date with this vendor? And be honest about those conversations because sometimes vendors can't be flexible with their payment terms because they're depending on your payments, the same way that you're depending on other people's payments to run their business. But it doesn't hurt to ask and to be sure that you're able to get the best and most optimized payment terms for your vendors so that you can plan your cash flow better for the new year. So identify those seasonal trends, identify those big expenses, look at your subscriptions,

and definitely negotiate or ensure you're finding ways to optimize your payment terms with your vendors. Map out your cash needs, of course, throughout the entire year. I would encourage you to do that if you have a cash flow estimator. Just do it for the entire year. even if you're not sure of all the receivables, of course you're not going to be sure of that, but you're going to be sure of the payables, or at least you can do a good job of estimating those payables out

all the way to the end of the year. And if not, just at least get a few quarters in, but have a sheet with the entire year there. And then really take a look and see, if you've done two quarters, can you now at least make estimates and drive off those estimates to see the cash flow? Again, your cash flow should always depend on actual cash on hand.

It should depend on an account, that you draw from your information so that you can see where your cash flow is going to be. And try your very best to build a cash reserve target, which should be three to six months of your operating expenses. This is difficult. So no sugar-coding it. It is difficult to build a cash reserve target, especially with certain industries. It's just really difficult to do that.

So do your best. Three to six months, try to build a cash reserve. And that will help you along the way, especially in planning difficult periods in the business. Maybe your business operates optimally in the spring and the summer, but then kind of falls off in the fall in the winter. So really make sure that you're planning those things appropriately. Now, if we take a look at your cash P&L and you feel good about it, let's go into your accrual P&L. Now, this is the time when you think about growth and you think about profitability. Now, your accrual P&L matters because it shows your genuine economic performance, how you're

actually doing economically as a business. Again, your cash tells you what's going in and what's going out. Your accrual tells you, okay, what business are you getting? And what are your expenses against that? So this is good for decision making. This is good for analysis and your trends to make sure you know and confirm the quarters where your business operates better. And this is what investors and lenders typically look at because they understand that cash is a different timing cycle altogether. They understand that cash operates differently depending on, again, payment terms and other parts of the business.

So maybe you're asking for equity for payment instead of cash. but that still has an economic equation. So your top line growth. And again, this is where you kind of run into a business where you say, okay, what's more important right now? Is it more important to do top line growth and at all costs get the top line revenue up? Or is it more important, excuse me, to be profitable? Is that more important for you? So based on that decision, if you look at top line growth, if that's a priority, you want to look at which

products and services are growing and which are shrinking, that's a really good way to assess that. What's selling well? You want to look at your customer concentration risk and you want to look at your pricing power. When did you last raise your prices? Now, this is really important because if you can do a good volume and if you maintain your rates the way you have them and you feel good about them, that's great. But again, only if it's profitable, for sure, awesome. But if you're looking to grow and you're not quite getting the volume of customers that you think you're going to get or you just haven't seen it yet, this could be a time to look at your pricing power. If your services are good, if your products are good, people are really highly satisfied with them,

as long as you're not aggressively raising your prices, in general, most customers and most clients will feel okay about our price raise, especially because cost of living continues to go up, expenses continue to go up. So they'll understand that. As long as they're not aggressive raising of the prices, but it's an acknowledgement of, hey, we've done really well, and we think we deserve a raise in a sense. So look at ways to do upsells to existing customers, reactivate any dormant clients. So there's clients that you just haven't talked to in a while, haven't done any work with, take a look at how you can go ahead and reactivate clients. And an important part of top line growth, as any business does, you have discounts.

And it can be easy to go customer first, and this is totally fine. It can be easy to go customer first and say, hey, we're going to discount, discount, discount to keep people happy if they're unhappy for some reason. Discount because the project went over. discount because the product I sent just wasn't that good and I got a few complaints. So I'm going to do a discount. Look at eliminating those discounting habits if possible. And especially in a services business, there are clear opportunities to eliminate discounts,

which is better assessment of the projects that you're doing, a better project management, better understanding the product you're selling. So try to eliminate those discounts because that will affect your top line growth. Profitability. So if profitability is. is your North Star. It's like, hey, we don't need to grow that much anymore. We just want to be more profitable.

You want to make sure you're doing a margin analysis. So go product by product, service by service. What is profitable? If you're a service business, it depends on work by employees that outputs profit. You want to take a look at per resource line item. Basically, who's making me money? Who's making the business money? You look at the list of employees, see who's profitable and do the analysis.

And then from there, you could look at ways to optimize each resource. You can take a look at ways to improve their work. You could look at educational opportunities, different things that allow you to optimize your resources appropriately so you can go ahead and get that margin up. You want to make sure you do an examination of your cost structure, fixed versus variable costs. Are your costs creeping up? That's another big thing. The cost of goods and services continues to rise. Are they creeping up for you? And what are ways that you can go ahead? And again, as I've mentioned before, offset those costs, opportunities to negotiate, et cetera. And looking at

those bloat points for your operating expenses, what's bloated. So if you do that, you can improve those margins. And if you think about it, take a moment to think, if I improve my margin by just 2%, that could be tens of thousands of dollars for 2%. So a reminder, you want to stay, the sweet spot is 15 to 30%. 30% is really good profitability. And you're doing business responsibly. If you're going above 30% in profitability, we've got to talk about what you're selling. Just kidding. Maybe you are doing really well. But that could be a deep dive that you can do. Again, though, the important point between profitability and top line revenue growth is which is your priority for the year.

And it depends on what you're prepared to do. If you're preparing for an exit and the acquiring company wants a profitable company, you make sure you prioritize profit. If you're being acquired by a company that really wants to see a lot of revenue, you concentrate on the revenue. It's not rocket science. It is difficult, but it's not rocket science. So just make sure you know what your priorities are and that will drive the audit appropriately. So make sure you identify your top three revenue drivers, top five, if you like, top five cost concerns, bloat points. And it can be any variable number.

I'm just giving you some ideas of how to take action. What can you do even this month to improve your profit margin? Okay. So we've definitely covered the numbers, at least the best of our abilities. I don't know your business. I'm not going to pretend to know your business. And again, any advice here is not. This is more of a, hey, let's talk about your business. Don't take this as solid advice until you actually consult with your professionals. Okay. Now let's talk about the humans in your company. And let's take a look at you, you entrepreneur that's running your company. This is a good. opportunity to do team check-ins and to assess your employees' career happiness. Because your people are your operations. And let's not do the AI conversation because people are still an important part of businesses. So if your people are your operations, you want to make sure they're optimal.

This is an important piece. Retention is cheaper than replacement. Always, always, always. When you have to replace somebody, it has to be for an important reason. And if you are finding yourself in constant replacement, you're in trouble. So make sure you do these check-in so you can retain your employees. Because to replace them costs time and money. Money and time in recruitment, money and time in onboarding and training,

and you're taking a few steps back in your product or your services lifecycle. So retention, retention, retention. And these conversations you have, these check-ins you have, well, hopefully, this is important, hopefully, because humans are humans, give you an idea of how they'll be through the year. So you get a really good sneak peek, okay, this is where this employee is going to be at. We got to make sure we do blank to cover a basis with this person. Now, career happiness, this is an important framework to look at, especially, if you want to use this as one of the key metrics for how your employees are feeling.

So here are some questions you can ask each team member. What energized you most last year? What drained you last year? What did you want to learn or do more of last year? What do you want to learn or do more of this year? And what support do you need? Now, the things you're listening for, important, is the employee truly listening to your questions.

And are they taking the opportunity and the time to answer them? If you ask these questions, and they go, no, no much. I didn't get drained. I don't know if I want to learn anything. I don't need support. Like if these are short answers and if they're kind of dismissive and there's not enough space for clarity and thinking, you don't have an engaged employee at that point and you need to go deeper.

And you need to find out what's happening because it's not just a paycheck. It really isn't. We have to get past that. With our employees, as important parts of the operations of a company, we need to know what makes them tick and what drives them. So if that engagement level is low, we need to figure out what's going on. You're also listening for any development needs that surface if this person is asking for educational assistance or they want to improve certain skills or they're concerned

about skill gaps they may have compared to their fellow peers in the company. that's something to look at. Signs of burnout. Now, we just kind of talked about that with the engagement level, but that certainly signs of burnout if someone is just going, eh, me, whatever. That could be a sign of burnout.

If they say, I'm tired all the time, that could be a sign of burnout. And a big one, their role. Does it fit for them still? Is it still something they like to do? Or are they looking at any type of movement lateral? or are they looking to start ascending? So these are the things that you're looking for in that framework.

Now, how do we operationalize that? We create some development plans. We identify opportunities for cross-training if there's some lateral movement requests. We spot those workload imbalances. Maybe we're overloading them for some reason. And then a big one, again, retention is better than replacement, but do we look at resource planning to hire someone new? or do we restructure?

But again, I feel like that part of it becomes the last ditch effort, the last thing you want to do. You want to do everything else before that. So again, retention, retention, retention. The ROI retention is this. The average cost of turnover is 50 to 200% of salary depending on the role. They also have a lot of institutional knowledge that they're taking with them. The cultural impact, right?

If someone decides to leave or you decide to dismiss their employment, that's going to affect the culture of the company to a degree, depending on how like they are. And that affects your stability. So really take a look. Make sure that you're fighting as hard as you can to retain. A 5K investment is a good example. A 5K investment in development beats a 50K recruitment cycle. That's an example, though. I mean, the numbers may not jive with what your reality is as far as investment and recruitment fees.

but again, cost is cost. So that is the, wow, we've done a lot. We've talked a lot of bit, but I think the idea is important here, which is, in fact, getting your financial foundations in order, and then getting your team and executing on moves in 2026 to ensure that your team is optimal, they're happy, they're good. Now, after you listen to this, if you're not doing anything else with this, try to block two full days in the next two weeks.

One day for financials and one day for team conversations. No meetings, no interruptions. Just work on the business foundation. These conversations are important because if you ignore these, what's going to happen is that things will come up when you least expected. You will get a lot of surprises. You'll get a lot of things that are boiling over that you did not see coming. And then boom.

So let's take these steps together to be. more successful together. All right. I want to thank you all so much. And again, to address the elephant in a room, we were off for a while because there was just too much going on. And I really personally, I could not maintain the schedule that I wanted to maintain and also record these episodes.

But we're back in the groove. We've done our Q1 assessments in a sense. And we'll come back with more episodes in 2026 to help you become a more innovative entrepreneur for your company. company for your business. So go ahead, take these actions, make a comment on the podcast that these steps and these ideas are helping you out. Episodes coming up for this year are going to be really great conversations with

entrepreneurs. So stand by for that. And thank you again for listening. Talk soon. Thanks for tuning into this episode of Fractal Focus. We hope you found valuable insights. If you enjoy the conversation and want to stay updated on the latest trends in expert advice, make sure you subscribe and leave a review. Your support helps us continue bringing you the content that drives your business forward.

Until next time, keep innovating and stay ahead of the curve.