Running a small business involves many moving pieces. When it comes to finances, having an organized system for the money coming in and out as well as incorporating assets and liability is key to making financially educated decisions. It tends to be **difficult for small businesses to get all the financial information needed in an easily digestible format**. Finding options for bookkeeping that give you data in an easy-to-understand format allows businesses to make the **next big decision** for your small business. When the time comes for the next steps, you’ll know exactly where you stand. 


## What Does It Mean to Be Financially Educated?

At its core, being financially educated _(or financially literate)_ means understanding the essential workings of money, including income, expenses and the difference between Net Profit and Cash Flow. Becoming financially literate is a long process in which you will continue to learn and expand your financial knowledge throughout your life.

>You don’t know what you don’t know. – Socrates

You will find that sometimes being **financially educated means being aware of what you do not know but knowing where to go to find the answers.**


## The Importance Of Accurate Books

Keeping accurate books is key to understanding where your company stands financially. Maintaining accurate and detailed records and reports prevents any surprises from popping up. In many ways, accurate books hold the power to make or break your business. Here are a few of the ways accurate bookkeeping helps your business run smoothly and efficiently: 

- Streamlines the process of running your business. 
- Find financial inefficiencies and implement cost-saving strategies
- Allows you to make real-time decisions.
- Makes generating financial reports swift and easy. 
- Allows for all financial information to exist in a centralized location. 

Being a small business owner often requires people to wear many hats. Streamlining and fostering an environment of efficiency is essential to creating a sustainable and thriving workflow. **Accurate bookkeeping is key for getting finances in order so you can focus on the bigger picture.**

## Understanding Your Income Statement

An Income Statement tracks your revenue, cost of goods, operating expenses and is able to tell you your Net Profit or Loss for a certain period of time. Income statements that are broken down into easy-to-read charts and details are incredibly valuable. Quality bookkeeping transforms all the information about income and expenses into beneficial charts and statements so small businesses know exactly where they’re at financially.

**The Benefit of a Monthly Review**

![The Benefit of a Monthly Review](https://storage.googleapis.com/pinto-blog/Pinto_Blog1_Support2_725bc18dcb/Pinto_Blog1_Support2_725bc18dcb.png) 

It is best to start with a high-level review of your finances. This includes key indicators to help you better understand how your company did each month, including: 

- Gross Revenue 
- Cost of Goods Sold
- Gross Profit 
- Operating Expense 
- Operating Revenue 
- Net Profit 

These numbers are specifically chosen as integral figures to show the financial status of your business. Concise reporting is important as it allows you to see the highlights rather than drowning in long statements. In your monthly review, you should look at trends over time. This helps to show the most profitable months and assess what adjustments may be made to increase profits year-round.

**The Monthly Review will also show Trend Reports over 12 months.** This helps to show the most profitable months and assess what adjustments may be made to increase profits year-round. 

## Income and Expenses Analysis

![Income and Expenses Analysis](https://storage.googleapis.com/pinto-blog/Pinto_Blog1_Support1_8b828c824e/Pinto_Blog1_Support1_8b828c824e.png)

**Breaking down and analyzing facts and figures** around your company’s income, expenses, and accounts receivable can provide valuable insights into **what is driving your business forward and holding you back**. A good practice is to prompt yourself with questions around these figures, for example:

1. Do only a few customers make up a large portion of your revenue? If so, how can we better mitigate risk around one of those customers leaving? 
2. Is revenue predictable each month or is it inconsistent? What can we do to create more consistency? 
3. What are your top 5 expenses each month? Is there anything we can do to make those categories more cost-efficient?

The **statement is designed to break every dollar coming in and out of the business into a solid Net Profit figure**. Net profits help companies to adjust expenses to optimize the amount of money the business makes. It can be difficult to keep track of all the expenses of running a small business and achieve an accurate number for profit. With the income statement, you can put away the calculator as you now have all of the crucial information that you need.

## Managing Cash Flow

The overall cash flow of a business is a strong indicator of how well a company is doing financially. Cash flow is vital for growing a business through new opportunities, contracts, investments, and more. With the financial statement, businesses will have their cash flow broken down into the following analysis: 

- Change In Cash 
- Month End Cash 
- How Long Will Your Cash Last?

Having your cash flow under wraps takes some strategy and skills, and to help you along the way here are some tips and **tricks for cash flow management:**

1. Create a Cash Flow Forecast
2. Detail out each account, both revenue and expenses.
3. Understand and plan for your financial business goals.
4. Is financing required? If so, what are the terms and what are the risks involved?

## The Takeaway

Making financially educated decisions requires you to get a full idea of the financial health of your small business. Using Pinto Financial helps expedite the relay of information and **financial analysis at an affordable price**. You’ll get your financial statements monthly in easily digestible figures to understand exactly where your company is at so you can make the best decisions moving forward. **To download a Sample Report** that is easy to read and understand, **click here**.

Being aware of what you do not know but knowing where to go to find the answers

Developing Financial Literacy For Small Businesses

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According to the U.S. Bureau of Labor Statistics, an astounding 75% of businesses fail in the long-term out of which **38% become the victim of running out of cash and failing to properly manage their money**. But that doesn’t stop founders from starting their own entrepreneurial journey.

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It was reported in 2020 that more than 40 million small businesses were operating in the United States alone. So, why is there a high percentage of businesses running out of cash? Narrowing it down, these are the top reasons why small businesses run out of cash fast:

1. Aren’t equipped to make informed and beneficial financial decisions.
2. Not knowing where the business requires spending.
3. Spending more to make more without proper planning.
4. Hiring too many people and not being able to pay employees.

Let’s dive more into detailed financial challenges that small businesses and startups typically deal with and how to overcome them to beat the odds

## Lack of Financial Planning


>If You Fail to Plan, You Are Planning to Fail” — Benjamin Franklin

Running a small business requires flexibility and constant change. However, this does not mean you should abandon financial planning. 

You should be able to allocate the funds to several sectors – _marketing, hiring, development, ads, etc –_ and should have enough funds until you plan your next raising round or more than enough in revenue. That being said, it’s advisable to follow one of the two common types of planning.

1. 12 Month Forecast
2. 13-Week Cash Flow Plan

By creating a financial plan, you’ll know where you’ll be spending and how much you’ll need to reach certain milestones. Without a proper financial plan, the future of your small business is in danger and the results can be detrimental.

## Earning Profits but Losing Cash

It is always exciting when your small business starts pulling in steady profits. It is easy to drive financial decisions based on these profits, but in a small business, this is rarely the best way to make financial decisions. **There is a difference between Net Profit and Cash Flow – we oftentimes refer to this as the “Cash Flow Spread”.**

Profits do not indicate Cash Flow. Expenses such as Owner Draws and loan repayments are examples of items that affect your cash but not your profit. When you base your decisions strictly off of profits, you are missing the Spread and this oftentimes can have detrimental effects on your business. 

## (Not) Planning For Taxes

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Raise your hand if you prioritize saving for taxes! Basic and simple tax preparation is imperative to running a successful small business. According to TaxesMastered.com, 85% of businesses overpay taxes which means planning for tax time is a common place where businesses make mistakes. As a general rule of thumb, **it is advantageous to set aside 15-20% of your Net Profits for taxes** but consult a professional for your effective tax rate to make sure you are covered. 

_An example: Let’s say you make $30,000 in Net Profit and you pay yourself that entire amount as your Owner Draw (salary) for running your business. While your profit is still $30k, your Cash Flow is now $0 but you still owe $4,500 (at 15%) in taxes. Saving each month for taxes is part of that Cash Flow Spread that often gets missed. Without proper savings, this can quickly present itself as an issue for your business._

## Relying on your Bank Balance?

It can be fun to open your bank account and check your balance – especially after you close that big sale. **In our estimation, 99% of small business owners drive their financial decision-making off of their balance.** Your bank account tells you what you have, not what you can sustainably spend. 

There are many short and long-term financial commitments involved in running a small business and your bank balance is not a good representation of your financial health. Expense and investment decisions should be made in reference to your financial plan combined with current revenue.

## Improperly Managing Books

Bookkeeping is imperative to running a successful business. If you are not managing your books and finances properly, you don’t have an informed idea of where your business stands financially. This results in a fallback to decision-making based on your bank balance. 

**_Bad data = bad decision-making._**

Using a professional service, such as Pinto Financial, guarantees you are getting accurate financial data, leading to quality decision-making. Bookkeeping is the foundation for financial success, make sure your foundation is solid before you start building on it. 

## Poor hiring tactics 
 
>“Hire Slow, Fire Fast.”

A bit ruthless some might say but personnel decisions can make or break your business. Whether you are hiring contractors or full-time employees, each person that you are committing to needs to fill a need or skill that will improve your business. 

We say hire slowly because you want to make the right decision on the first attempt. It is both time and financially efficient to spend significantly longer hiring the right candidate than to jump to the first or second applicant because you are drowning in work. Hiring is expensive and having to let someone go and repeat the process because of impatience only makes things worse. 

In the end, **you’re not just paying that person but investing in them so that they can help you increase the ROI.**

## Overspending

As the motto goes: **“You’ve got to spend money to make money.”** But take that with a grain of salt. If you have a solid financial plan in place you’ll be able to know exactly what you can spend and how to spend it. You’ll know the instant you’ve blown the budget.

While this is an extension of overhiring, there are so many other places a business owner can use their hard-earned dollars. COGS, advertising, software, and the list goes on. _Consult your books, look at your plan and most importantly, adjust as time goes on and you’ll be on the road to success._

## Accumulating Credit Card Debt

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Here at Pinto, we will Never recommend using credit cards as a form of debt – ever. Period. Credit card interest rates are borderline predatory and repaying credit card debt feels like being in an endless loop. 

**Here’s what we do recommend for credit card use:**

1. Use it as you would a debit card. Spend what you have and pay off your statement balance (or full balance) each month. 
2. If you are struggling to find a reasonable loan, find a card with 0% interest for a certain period of time, typically 6 to 12 months. This buys you some leeway but you absolutely must pay off the entire balance before the promotional 0% interest runs out. Typically credit card companies will assess interest retroactively to the date of the original purchases as opposed to when the promotional rate ends. This can easily be the difference of thousands of dollars of interest payments – begin the downward spiral of credit card debt! 

## Investment or Accumulating Loan Debt Without A Plan

Investing and taking out loans are often necessary for running small businesses. However, they can run you right into the ground if you don’t have a plan in place to pay them back. Here are some important considerations to make before taking on debt: 

1. **Bootstrap or Self-Investment:** Most small businesses start with the business owner using their own money or capital to get their business off the ground. Entrepreneurship is a big step and can be scary for most people. Is it worth investing your money with no business plan? 
2. **Debt:** Responsible debt is a great financial tool to help your business get off the ground and gain profitability. A sound financial plan will show you when that debt will be paid off and how it will help you break even and eventually make profits month over month. 

## The Take-Away

Running a small business requires making frequent financial decisions. It is all too common that business owners to make poor decisions based on a lack of expertise and understanding of their financial health. This is where Pinto can help. Reach out to us today for a free consultation to help you set your small business on the path to success. 

_*Please seek professional and certified advice regarding all tax-based decisions._

9 Ways Small Businesses Make Poor Financial Decisions

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>“Life moves pretty fast. If you don’t stop and look around once in a while, you could miss it.” -Ferris Bueller

Let’s take a quick glimpse into the life of a business owner: _endless tasks and never-ending to-do lists_! It’s inevitable that we get wrapped up in the day-to-day and forget to step back and look at the bigger picture. 9 out of 10 times our financial picture takes that back seat.

It requires effort, continual and consistent data and a solid forecast. These items don’t always affect your day-to-day and therefore keep getting pushed until your finances are fully neglected. Before you know it, the year is over and you’ve thrown a dart in the dark, hoping you come out of the year with more money than you started with. 

Creating and following a financial plan is a foolproof way to end the year with more than you started with. It is a **guiding light into the future state of your financial health**. Let’s dive into a 7-step process of creating your financial business plan. 

# What is a Financial Plan?

**A financial plan is a comprehensive evaluation of a business’s current revenue, expenses and future financial state**. The plan projects whether the company will have enough money to maintain its operations and meet its financial obligations or not. It also assesses if the business is on track to achieve specific financial goals, such as paying off loans or meeting revenue targets.

It can help you to identify potential problem areas and take steps to avoid them as well as provide a roadmap to follow as your business grows. Lastly, it can also help with securing funding from investors, a bank loan, or a line of credit.

## The Financial Planning Process

Creating a financial plan can be overwhelming as there are so many different aspects to consider. _Where do I start and what makes a good plan? How do I know my plan will actually set me up for success and what if I miss something?_ These are thoughts that will likely go through your head as you create your own financial plan and we hope to provide some guidance with the below steps. 

### 1. Goal Setting: The Tool for Measuring Success
When starting a financial plan, it’s important to have 2 or 3 end goals in mind. We usually start by asking “From a financial perspective, **_what would make you happy at the end of the year?”_** Here are some ideas to get you started:

- A certain amount of Profit or Cash Flow
- Being able to pay myself a certain salary
- Being able to hire x amount of employees
- Being able to give x% raises to my employees
- Growing Revenue by x% from the prior year
- Being able to invest in new products or equipment
- Most importantly, be creative and decide on goals that are important to you.

### 2. Revenue Projections

![How to set Revenue Projections](https://storage.googleapis.com/pinto-blog/Blog_Post_5_Chart_fc3a16ff6b/Blog_Post_5_Chart_fc3a16ff6b.png)

There are two types of Projections:

- **Top-Down**: Project realistic revenue and work down to understand your cash flow
- **Bottom-Up**: Start with the desired cash flow and determine the revenue required to support your business.

This process discusses the Top-Down method as most businesses I work with have historical data to drive decision-making and I find that the end results tend to be more realistic.

I encourage revenue estimates to be conservative so as to not over-inflate what you expect to earn. Beating your revenue projections is always better than not being able to keep up. We plan our expenses based off of planned revenue, so over-inflating has a trickle-down effect on our **Net Profit and Cash Flow**. Here are a few things to consider when estimating your revenue. 

**First, understand your revenue model. How do you charge your customers?**

- Recurring Revenue – Think Saas or subscription-based models (ARR/MRR)
 - If so, Year over Year (YoY) or Month over Month (MoM) projections are useful
- Seasonal/Cyclical Revenue
 - Looking at specific periods in the past will be the most helpful 
- One-Time Sales
 - This is likely based on marketing and sales performance and is likely tied to your marketing and ad spend
- What other types of revenue could you have and what factors determine that revenue?

**Secondly**, consider adding some goals to your revenue projections, but remember to not over-inflate!

- What if we increase our product pricing by 10%?
- What if we double the amount we spend on Google ads?
- What if we hire new customer support or sales rep?
- What if there is an increase in the churn rate?

### 3. Cost of Goods Sold

Once you have estimated your revenue, you will need to estimate your cost of goods sold (COGS). This includes the _cost of materials, labour, and any other direct costs associated with producing_ your product or service. If the cost of your supplies or labour is rising, you should update the expenses for future months in your plan to reflect the changing cost. 

It is important to analyze your profit margins to make sure that the difference between what you charge your customers and your cost is acceptable and has enough margin to cover your overhead expenses while providing a significant Net Profit. If you find that your overhead costs are too high, you can either come back and adjust your COGS or trim your overhead expenses to fit within your budget. 

### 4. Fixed Expenses

“Fixed expenses” do not refer only to expenses that are the same each month (like your phone bill). We consider fixed expenses to be those bills that are required each month. For example, a utility bill could vary drastically throughout the year, but you are responsible for paying that bill on a monthly basis. Here are the accounts we normally put under Fixed Expenses:

- merchant/credit card fees
- insurance
- rent
- utilities

### 5. Headcount

Often, the most expensive item to consider is headcount. This includes the salaries of all your employees, as well as any benefits they may receive. If you are an S-Corp, your W-2 salary is also included in this section along with other contractors, if you have any (just because they may not be W-2 employees, we often consider them as headcount in small businesses).

**_One of the most common questions among all business owners is: “Can I hire and can I give a raise?”_** 

Being able to plan future hires and raises while seeing how that affects your overall profit and cash flow from a monthly and annual perspective is invaluable information. You’ll know in an instant if you can afford your hiring decisions or if you need to raise revenue or make other cuts to bring on someone new. 

### 6. Variable Expenses

![How to manage your Variable Expenses](https://storage.googleapis.com/pinto-blog/Blog_Post_5_Bill_61c50e8623/Blog_Post_5_Bill_61c50e8623.png)

Variable expenses are those that fluctuate from month to month and are generally the easiest to adjust. Examples of variable expenses include advertising, travel, and software subscriptions. Though you will experience most of the expenses at some point during the year, you may not pay them each month, and the amount may vary considerably. 

Depending on your business and as you grow, variable expenses can be harder to predict each year. We like to inflate these expenses as much as possible to account for unpredictable situations, given we are still able to maintain healthy Profit and Cash Flow Levels.

### 7. Long-Term Liabilities and Equity

While Net Profit is important, Cash Flow is King when it comes to financial planning for small businesses. 

The steps listed above only affect the Income Statement and therefore, your Net Profit. With a few simple adjustments, you can take into account other items that affect your overall Cash Flow, such as your owner’s draw and principal payments on loans. Accounting for these cash-flow items gives you the whole picture and not just your Net Profit. 

In the end, analyze your monthly and annual Cash Flow, Net Profit and the initial goals you made for yourself. At this point, it is much easier to go back, adjust and make sure you have realistic numbers while hitting all of your goals. 

**Financial planning is an exercise that requires both data and projections**, as you can’t completely rely on each individually, but it’s also not guesswork. Consider it an art and a skill. Make sure to follow the above-mentioned practices and make it a recurring part of your business. If you have specific questions or just want more advice about the topic, reach out to me, at **ben@pintofinancial.com**.

Your financial plan is a guiding light into the future state of your financial health

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Your Business Needs a (Financial) Plan

A profit and loss (P&L) statement (also referred to as an Income Statement) is the best tool for calculating your income. You’ll need a P&L to complete your tax return at the end of the year or secure a loan.

But a P&L’s usefulness goes much further than these mundane uses.

When evaluated correctly, a P&L can provide valuable insights into the health of your business and can illustrate areas of potential improvement. We’ll take a look at the seven best ways to use your P&L to manage your business.

## Track Revenue and Expenses

At its most basic level, a P&L allows you to track your business’s income and expenses. The information contained in your P&L can be helpful in understanding **where your money is going and where you might be able to cut costs**. Ensuring that your expenses are properly categorized will give you an accurate picture of your business, and you’ll then use these figures to determine your net income. 

If you add in a few adjustments, you can get to your **net cash flow**, which can provide more valuable insights. By tracking your P&L regularly, you can gain valuable insights into the financial health of your business.

## Setting Financial Goals

![Checklist Icon for how to set Financial Goals](https://storage.googleapis.com/pinto-blog/Blog_Post_4_Checklist_Icon_7f075f6e18/Blog_Post_4_Checklist_Icon_7f075f6e18.png)

The P&L statement can be used to set financial goals, track progress, and make informed decisions about where to allocate resources. For example,**a company might use its P&L statement to set a goal of increasing revenue by 25% next year**. To achieve this goal, the company might **need to invest in new marketing initiatives or product development.**

Your current P&L will contain the starting point for your goal setting, and your future P&Ls will show your progress. If your P&L isn’t moving closer to your goal, you’ll need to step back and evaluate what’s holding you back.

**Here is a list of common financial goals we see from small businesses:**

1. Expand my team and give raises
2. Increase yearly revenue by x%
3. Maintain a Net Profit of $x or a Net Profit Margin of x%
4. Increase my owner pay

## Manage Financial Plans

A financial plan for the year is a valuable tool for any business, large or small. Setting goals is only the first step. The next step is to track your progress against those goals. A plan will allow you to **compare your actual results from your P&L to your expectations** and to reign in your spending throughout the year. 

It can help you identify areas where you are overspending or underperforming and then make adjustments to improve your financial performance. Having a financial plan in place can simplify the numerous decisions that a business owner needs to make each day. 


>The plan also allows you to make proactive decisions about your spending instead of reactive decisions.

Though there are always unexpected expenses in businesses, a financial plan minimizes the chance that you’ll spend unwisely.

## Sticking to Your Financial Plan?

A financial plan is essential for anyone who wants to get a handle on their finances. For example, if your P&L shows that you are spending more than you planned for travel expenses, you can adjust your plan accordingly, which will show you how that affects the rest of your year. Similarly, if you see that you are spending more on office supplies than planned, you can cut back on other areas to make up the difference. 

By tracking your spending from your P&L and making adjustments to your plan as needed, you can ensure that you **stay on track and avoid overspending in specific areas of your business.**

## Monitor Pricing & Margins

The P&L is often used to monitor **whether the company’s pricing is appropriate and whether it is generating sufficient profits.** Monitoring pricing and margins is an ongoing process that needs to be regularly evaluated. While finding your ideal price point may take time, **continually getting pricing wrong can hurt a business and quickly diminish its profit margins.**

When determining pricing, you’ll want to evaluate **how much it cost you to build** each unit or the time it takes you to provide a service. It is also wise to consider **what a customer is willing to pay**. Setting the right pricing strategy will give you true value and customer satisfaction with the product. Leaving more than enough profit margin to cover the overhead expenses and run the business smoothly. 

Reviewing your margins by product or service is helpful in identifying your most profitable goods and services. This allows you to **focus more attention on the profitable items** and remove or adjust the products that are not making as much margin. 

## Track Changes Over Time

![ Track financial Changes Over Time](https://storage.googleapis.com/pinto-blog/Blog_Post_4_Money_Sign_65b4ea2c57/Blog_Post_4_Money_Sign_65b4ea2c57.png)

A P&L is one of the most important tools in business analysis. It is used to track revenue and expenses over a period of time and to compare those figures against each other to determine growth trends. This can help to **identify increasing costs or declining sales and pinpoint where those trends are originating from**. 

By understanding these trends, businesses can make adjustments to their plan and operations accordingly to better hit their growth targets. 

## Assess Credit Terms

Your credit terms don’t directly affect the P&L, but understanding that you can have sales on your books before you receive the cash can be helpful when evaluating the terms you use when billing your clients.

A retail store collects its revenue when the sale occurs. Other businesses collect deposits for services or goods that will be delivered at some point in the future. But **if you allow your customers to pay you after the work is done**, you need to monitor how long it takes your customers to pay their invoices. If your customers are taking too long to pay you, **then you should evaluate whether it’s hurting your cash flow**.

## Lastly,

Running a successful business means understanding your company’s financial health, and a P&L is one of the tools in your arsenal. But if you find the numbers intimidating or just need a second set of eyes, you should consider working with a financial professional who can walk you through the evaluation process. 

**Pinto** has been working with businesses for years to simplify the financial evaluation and monitoring of business activities. It provides the financial reports that give you a clear picture of your budget and actual amounts spent, so you can monitor your goals throughout the year. Our reports include visualizations that provide key insights to small business owners into the financial health of their operations.

A P&L statement is the best tool for calculating your income

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7 Ways to Improve your Business using your P&L

Most businesses focus on their net profit as the bottom line. But **there’s more to a business than just its net profit**. In fact, net profit is just one part of the equation when it comes to measuring business success.

 
>**_It’s important to note that checking your bank balance is not the same as monitoring your cash flow. Your bank balance does not take into account outstanding payments and upcoming expenses._**

## Net Profit: What Is It?

Profit means different things at different times of the year. When you’re doing your taxes, you want to minimize the profit you show on your books. When you’re applying for a loan, you want to look as profitable as possible. Honesty first, of course, but there are grey areas in business expenses that can be used to offset your business income.

**To calculate net profit**, you start with the company’s total revenue. For most businesses, revenue is simply the company’s income generated from sales. Then you subtract all the company’s expenses. These include things like the cost of goods sold, operating expenses, and interest. The result is the net profit. 

This number can give you a quick snapshot of how profitable a company is. It’s important to keep in mind, though, that net profit can be affected by one-time items, like the sale of a piece of equipment. So it’s not always the best number to look at if you’re trying to get a sense of a company’s overall financial health. 

Net profit can be a helpful measure for comparing different companies or for tracking a company’s performance over time. In the example below, the company’s net profit is $20,000. 

![Pinto-Blog3-02.png](https://storage.googleapis.com/pinto-blog/Pinto_Blog3_02_ccaa4ef142/Pinto_Blog3_02_ccaa4ef142.png)

## What Are The Limitations of Net Profit?

Net profit can’t, by itself, tell if you have enough income to support your business because net profit ignores principal payments on loans, distributions to owners, inventory, and equipment purchases. 

In the example above, the company is profitable, but is the company going to have enough cash at the end of the year? If the owner takes a disbursement each month of $3,000, they will be receiving $36,000 in disbursements each year. Keep in mind the company is making $20,000 in profit for the year, so an extra $16,000 more will be withdrawn from the business than what was earned as profit. Therefore the company is profitable but operates in a Cash Flow Negative state. Eventually, this business will run out of cash.  

Additionally, net profit can give you a distorted view of your business’s financial health. It can fluctuate from month to month or year to year, making it an unreliable metric for long-term planning. 

## Cash Flow: What Is It?


>**“Never take your eyes off the cash flow because it’s the lifeblood of business.” —Sir Richard Branson**

You’ve probably heard the term “cash flow” before, but what does it actually mean? Cash flow is the sum of inflows minus outflows of your company.  Keeping track of your cash flow is important because it can help you to avoid running into financial trouble down the road. **By calculating your daily, weekly, or monthly cash flow and comparing it to your cash available you can determine how long your company can survive with its available funds.**

To get started, take your net profit, which we calculated in the example above. Then you can calculate your cash flow which includes looking at your principal payments on loans and distributions to owners. See the continuation of our hypothetical business below. 

![Pinto-Blog3-03 (1).png](https://storage.googleapis.com/pinto-blog/Pinto_Blog3_03_1_4251123b1d/Pinto_Blog3_03_1_4251123b1d.png)

In this case, the company is profitable, but unless it has a significant cash reserve, it will run out of cash. We can also determine when this company will run out of cash, otherwise known as their Runway. If the company starts with $50,000 of cash but has a negative cash flow of $24,000 then it will run out of funds in just over two years ($50,000 / $24,000). A Runway calculation is useful for companies with negative cash flows. 

**Runway = Available Cash / Cash Flow**

This will give you a good idea of how much money is coming in and going out each month. From there, you can start to look for ways to improve your cash flow. For example, if you’re spending more money than you’re bringing in, you’ll need to find ways to cut costs or increase revenue. 

On the other hand, if you have a lot of money left over each month, you may want to consider investing some of that money back into your business. Tracking your cash flow is an important part of running a successful business, so make sure to give it the attention it deserves.

### How does cash flow differ from net profit, and why is it important to track it separately?

Net profit measures a company’s profitability. Cash flow, on the other hand, is measured on the total cash coming in and out of a company. It’s important to track cash flow separately from net profit because they can differ significantly. 

For example, a company might have high net profit but low cash flow if it’s spending a lot on inventory or equipment. By tracking both net profit and cash flow, companies can get the complete picture of their financial health.

### How can businesses use cash flow to make better decisions about their operations and investments?

**Cash flow is one of the most important indicators of a company’s financial health.** By tracking cash inflows and outflows, businesses can get a clear picture of their current financial situation. This information can be used to make informed decisions about operations and investments. For example, if a company is facing cash flow problems, it may need to cut back on expenses or raise money through new investments. 

Conversely, if a company has strong cash flow, it may be able to reinvest those funds in new projects or expand its operations. In either case, businesses should use cash flow data to make informed decisions that will maximize their chances of success.

### How to Get From Net Profit to Cash Flow?

Most small businesses can calculate their cash flow by taking the business’s net profit and making a few adjustments. The profit and loss will take into account revenue and expenses. To simply determine cash flow, you’ll need to adjust for principal payments on loans and distributions to owners. While there are other factors that may affect cash flow, this is typically sufficient for most small businesses. Once you’ve made these adjustments, you’ll have your cash flow for the period. 

### Are there any other factors business owners should consider when looking at their financial statements?

You should consider short-term variations in your net profit and cash flow to evaluate your business. Keep in mind that one-time expenses can have a significant impact on your company’s bottom line and cash.  

**Pinto** has been helping businesses navigate the confusing world of net profit and cash flow to determine the financial health of their operations. By working with a trusted accounting professional, you’ll be well-informed and be able to make timely decisions to strengthen your business.

Net profit is just one part of the equation when it comes to measuring business success

Learn Small Business Financial Secrets

Developing Financial Literacy For Small Businesses

9 Ways Small Businesses Make Poor Financial Decisions

Your Business Needs a (Financial) Plan

7 Ways to Improve your Business using your P&L

Net Profit: There’s more to the story

Join the Pinto Newsletter

Start Building Profitably today.
Get your business on track and profitable quickly.

Learn Small Business Financial Secrets

Developing Financial Literacy For Small Businesses

9 Ways Small Businesses Make Poor Financial Decisions

Your Business Needs a (Financial) Plan

7 Ways to Improve your Business using your P&L

Net Profit: There’s more to the story

Join the Pinto Newsletter

Start Building Profitably today.Get your business on track and profitable quickly.

Start Building Profitably today.
Get your business on track and profitable quickly.