Discover if our Fractional CFO Services Are Your Perfect Fit.

Profit with Purpose: Financial Freedom for Your Social Impact Business

Profit with Purpose: Financial Freedom for Your Social Impact Business

Building a mission-driven business is a fulfilling journey. 

As a passionate founder, you’re working hard to make a positive impact in your community and on the planet while balancing profitability to ensure your business thrives in the long run.

Navigating the path to purposeful profitability can feel overwhelming at times. But remember, you’re not alone!

Understanding key financial concepts is essential for making informed decisions and ensuring your business stays strong.

At Profit Reimagined, we believe in the power of combining financial knowledge with social impact. Our mission is to empower the financial journeys of mission-driven businesses and contribute to meaningful growth.

This blog post will serve as your guide to figure out financial health, focusing on essential concepts like cash flow, gross margin, financial forecasting, and how a Fractional CFO can help you achieve both your financial goals and your business’ purpose.

By equipping yourself with this financial knowledge, you can ensure your business not only makes a positive impact but also has the financial foundation to achieve long-term sustainable success.

Profit vs. Cash Flow: Understanding the Difference

Many founders mistakenly believe that a high profit equals a healthy business. However, there’s a crucial distinction between profit (net income) and cash flow. 

Profit reflects your overall profitability after deducting all expenses from revenue. 

Cash flow, on the other hand, is the movement of money in and out of your business – your cash inflows and outflows. 

While profit is calculated based on accrual accounting (revenue recognized at sale, even if cash hasn’t been received yet), cash flow reflects the actual cash coming in and going out. This means you can be profitable on paper but still struggle with cash flow if customers haven’t paid their invoices yet.

If you feel inclined to dive deeper in this topic read  The profit dilemma: Why a Profitable Business Can Still Struggle With Cash Flow where you will understand why they don’t always match up, identify signs you might be in trouble and learn some strategies to take control of your cash flow.

Mastering Cash Flow Operation

There are three main types of cash flow: operating, investing, and financing. Each type provides insights into different aspects of a company’s financial activities and health. 

➝ Investing Cash Flow tracks the money your business gains or spends on investments. It provides insights into a company’s investment strategy. Cash flow from investing activities can be found on the cash flow statement. 

➝ Financing Cash Flow Financing covers the cash exchanges between your company and its owners, creditors, or investors. It reveals how your company finances its operations and expansion, which might involve debt, equity, and dividend payouts.

➝ Operating Cash Flow reflects your day-to-day business activities. Maintaining a positive cash flow is crucial to sustain healthy business growth.

For this blog, we’ll focus on operating cash flow, which is the lifeblood of any business, but especially for mission-driven ventures. It’s more than just a vanity metric; it  reflects your overall financial health after expenses, cash flow deals with the cold hard cash you have available to pay bills, invest in growth, and keep your operations running smoothly. 

Simply put, ensuring a steady stream of incoming cash is essential for keeping your mission-driven business afloat and thriving.

Regularly monitoring your operating cash flow is like checking the gas gauge on a long road trip. It allows you to identify potential shortfalls – those moments where your expenses might outpace your incoming cash. 

Knowing your “runway date” – the day your cash flow reaches zero – is like understanding how far you can drive on that tank.  This crucial information empowers you to make proactive decisions. You can adjust your course, secure additional funding, or optimize your spending to ensure your mission-driven business has the fuel it needs to reach its destination.

Cash flow modeling is like having a financial crystal ball. It allows you to play “what-if” with your finances and prepare for various scenarios. 

Imagine a founder asking, “What if we experience a sudden surge in sales?” Cash flow modeling can answer that question by simulating the impact on your cash flow. This empowers you to not only celebrate growth but also identify potential shortfalls caused by rapid expansion. 

The key is to consider both sides of the coin – growth opportunities and potential risks. Don’t get so excited by a potential upswing that you neglect to plan for potential downturns. 

Building a robust cash flow model requires the foundation laid in the previous steps: understanding your business, identifying your runway date, and taking action to extend it. 

By incorporating these elements, you can create a reliable financial roadmap that guides your mission-driven business through any situation.

Our podcast episode Cash Flow Operation: Monitor, Manage and Model we provide you with additional tools and strategies to have a solid grasp on cash flow management.

Gross Margin: A Simple Metric for Big Insights

Gross margin is a powerful metric that provides valuable insights into your business’s financial health. It reflects the profitability of your core operations by revealing how much profit you earn after accounting for the direct cost of producing your goods or services.

You can calculate your gross margin by subtracting your cost of goods sold from your revenue and then dividing that number by your revenue.

calculate your gross margin by subtracting your cost of goods sold from your revenue and then dividing that number by your revenue

Did you know your gross margin can act as a financial flashlight, revealing potential issues in your business? 

A gross margin of 30% or lower suggests two areas for investigation: pricing and cost of goods sold (COGS). Here’s why:

  • Low Gross Margin & Pricing Mismatch: If your COGS are high but your pricing isn’t adjusted accordingly, your profit margin shrinks. This indicates a potential need to re-evaluate your pricing strategy to ensure it covers production costs and leaves room for profitability.
  • Low Gross Margin & Incomplete COGS: Conversely, a low gross margin might also signal that you’ve underestimated your COGS. This could be due to overlooking hidden costs associated with producing your goods or services. In this case, a more comprehensive analysis of COGS is necessary to ensure your pricing accurately reflects the true cost of delivering value to your customers.

In our episode Gross Margin: The Simple Number That Provides Financial Clarity for CEOs we delve into how to calculate your gross margin percentage, how to interpret it and how to use it to improve your pricing strategy and overall financial sustainability.

Building Financial Forecasts Rooted in Your Mission

Forecasting is a powerful tool, but it’s not perfect. Here’s the reality:

  • The future is uncertain: Unexpected events, like economic crashes or tech disruptions, can derail even the best forecasts.
  • Data’s not flawless: Forecasts rely on past data and future assumptions. If your data is shaky or predicting future trends is impossible, your forecast will be too.
  • We’re all human: People make mistakes when interpreting data and making assumptions. These errors, even small ones, can significantly impact the final forecast.
  • Your business evolves: New products, leadership changes, or strategic shifts can affect your finances in unforeseen ways.

The takeaway? Forecasting is very valuable, but use it as a flexible guide, not a rigid script. 

By acknowledging its limitations, you can leverage its strengths to navigate the unknown and propel your mission-driven business forward.

Financial forecasting is like having a roadmap for your mission-driven business. It doesn’t guarantee a smooth ride, it empowers you to handle any bumps that may arise along the way.

Here’s how:

  • Early Warning System: Forecasting allows you to identify potential deviations from your plans – both positive surprises (like exceeding sales targets) and unexpected challenges (like a dip in customer demand). By spotting these trends early on, you can take proactive measures to capitalize on opportunities or mitigate potential risks.
  • Course Correction Companion: Deviations from your forecast can be valuable learning opportunities. By analyzing the cause of these shifts, you can make informed course corrections – adjusting marketing strategies, optimizing resource allocation, or refining your pricing structure – to ensure your business stays on track to achieve its goals.
  • Resource Readiness: Financial forecasts provide valuable insights into your future resource needs. Knowing how much funding you’ll require to support your mission-driven initiatives allows you to plan for investments in staffing, technology, or inventory to ensure you have the resources needed to fuel your growth and social impact.
  • Cash Flow Compass: Forecasting future cash flow is like having a compass on your financial journey. It helps you anticipate potential shortfalls and make informed decisions about financing options or cash flow management strategies. By proactively planning for your cash flow needs, you can avoid financial turbulence and ensure your business has the resources it needs to navigate towards its long-term vision.

Financial forecasting is more than just predicting numbers; it’s a strategic tool that empowers you to guide your mission-driven business towards impactful success. 

Here’s why:

Start with your mission at the heart of your decisions: When you’re preparing forecasts for your business, place your mission and the impact you want to create at the center of your planning. This approach helps you set the right priorities and reminds you why you started this journey in the first place. By doing so, you maintain clarity and focus on your financial decisions, allocating resources strategically to drive initiatives aligned with your mission. 

For example, if your mission is to provide educational resources to underprivileged communities, your forecast might prioritize investments in technology to expand your online learning platform, even if it means sacrificing additional marketing spend for brand awareness.

Gather and Analyze Data: A strong forecast is built on a solid foundation of data. This includes your historical operational data, such as: 

  • Total leads
  • Inventory turnover
  • Production capacity
  • Customer lifetime value
  • Customer conversion rate
  • Customer acquisition cost
  • Accounts receivable turnover
  • Average revenue per customer

Then, take a deep dive into your operational data, and answer these questions:

  • What factors influenced past performance? 
  • Was there a marketing campaign that drove sales? 
  • Did a seasonal shift impact inventory needs? 

Understanding the “why” behind the numbers is key.  

Next, look outward. Consider potential future scenarios based on external factors – economic trends, industry shifts, and the impact of your marketing efforts. 

Finally, assess different pathways to achieve your goals, always ensuring that your financial decisions remain aligned with your core values.

Utilize a Forecasting Tool and Regularly Update: Once you’ve gathered and analyzed data, it’s time to translate insights into action. There are many financial forecasting tools available, some simple spreadsheets, others more sophisticated software. 

Regardless of the tool, the key is to input your data and assumptions to create a financial projection. Remember, a forecast is not a crystal ball; it’s a living document that improves with updates. Regularly revisit your forecast, incorporating new data and adjusting assumptions as needed. 

This ongoing refinement ensures your financial roadmap remains relevant and helps you navigate your mission-driven business towards a future filled with both financial sustainability and impactful success.

Our episode Impactful Decisions: Building Financial Forecasts Rooted in Your Mission  breaks down the key steps to creating a financial forecast, even with the understanding that things can change along the way.

The Power of a Fractional CFO for Your Mission

Strong financial knowledge is crucial for any business with a social mission. But as your venture grows, a critical question arises: Does your current financial team have the tools to provide the strategic direction required to amplify your impact?

Accountants and bookkeepers are vital, but a fractional CFO brings a unique edge to the table.

A fractional CFO goes beyond traditional bookkeeping and accounting tasks. They act as a strategic partner, translating your mission and vision into clear financial roadmaps. 

At this point you might be wondering if Profit Reimagine is a good fit for you and your organization. Get a clear idea of the possibilities we can create for you.

At this point you might be wondering if Profit Reimagined is a good fit for you and your organization.

Get a clear idea of the possibilities we can create for you.

This expertise is delivered on a part-time basis, making it a cost-effective solution for businesses of all sizes. Moreover, a fractional CFO who aligns with your social impact goals can become an invaluable asset, fostering sustainable growth while maintaining your commitment to positive change.

Here’s how a fractional CFO can empower your mission-driven business:

  1. Enhanced Cash Flow Management: Cash flow is the lifeblood of any organization. A fractional CFO can assist you in developing accurate cash flow forecasts, ensuring you have the resources necessary to navigate operational fluctuations and unforeseen challenges. This proactive approach prevents financial disruptions that could derail your social impact efforts.
  2. Deeper Financial Statement Analysis: Understanding financial statements can often feel like navigating a maze. A fractional CFO acts as your guide, decoding these reports, spotting potential concerns, and revealing valuable insights. With a clearer grasp of your financial well-being, you’re empowered to make strategic decisions that amplify your impact.
  3. Data-Driven Budgeting and Forecasting: Operating without a budget and clear financial projections is akin to navigating without a map. A fractional CFO leverages their financial expertise to create data-driven roadmaps, enabling you to course-correct before allocating resources to ineffective strategies. This ensures your financial resources are strategically aligned with your mission.
  4. Collaborative Problem-Solving: The most successful partnerships are built on shared values and a commitment to a common goal. A fractional CFO who aligns with your mission becomes a trusted advisor, working collaboratively with you to analyze key metrics, test and refine strategies, and proactively address challenges. This collaborative approach fosters innovation and ensures your social impact journey remains on track.
  5. Improved Efficiency and Resource Allocation: Financial reporting can be a time-consuming endeavor. A fractional CFO can take on these tasks, freeing you and your team to focus on core mission-driven activities. This improved efficiency allows you to allocate your resources more strategically, maximizing your positive impact.
  6. Risk Mitigation for Sustainable Growth: The business landscape is inherently unpredictable. A fractional CFO can identify and assess potential risks, allowing you to develop mitigation strategies. This proactive approach safeguards your financial health and ensures your social impact initiatives can continue to flourish, even amidst unforeseen economic fluctuations.
  7. Specialized Expertise at Your Fingertips: Expert guidance can be invaluable. A fractional CFO offers a wealth of knowledge in specialized areas such as mergers and acquisitions, investor relations, and due diligence. This expertise empowers you to make informed financial decisions that contribute to your long-term social impact goals.

By partnering with a fractional CFO who shares your commitment to social good, you gain a strategic advantage that supports your growth journey. This financial leadership empowers you to achieve financial security, focus on your core mission, and become proactive in managing your business. 

Ready to Take the Next Step?

At Profit Reimagined™ Inc.,we break down complex financial data and help you understand its importance. We challenge your thinking while providing the emotional support that empower you to make informed financial decisions.

Schedule a discovery call with us today! We take care of your internal finances, allowing you to concentrate on shaping a legacy that uplifts our world.

LinkedIn
Facebook
Twitter

Keep Learning

Ready to subscribe and make some impact?

We donate to teaching financial literacy to family, educating women to have their own business or supporting girls to advance!