The Loop Every Business Runs On

PROFIT MASTERY PRESENTS
The Profit Move
How a business actually works
{{current_date_full}} · 6-minute read
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▍ NEW · THE FULL EDITION

Starting today, The Profit Move comes in two halves. The free half, the number, the move, the quick hits, and the first half of Colin's article, is yours every Thursday. The Full Edition picks up right where Colin's article cuts off: the rest of his breakdown plus a worked example, and if you're a PM Pro member it's already included in your membership. You'll hit the line partway through his article below.

Hi {{first_name|there}},

Last month you explained your business, diagnosed it, and pointed it at the future. Today we look under the hood at how the money actually moves. Because you can't fix a loop you can't see.

The 20-second version: every dollar runs through one loop. Assets create revenue, revenue becomes profit, and profit funds the balance sheet again. Where your profit stops is the reason you can be profitable and still broke.

▍ IN THIS EDITION

•  The number that says most owners are owed money they haven't collected

•  Colin maps the loop your money runs on, and the three doors every dollar of profit walks through

•  One tap on the tool we're building, plus the first-ever Full Edition and what members now get

THE NUMBER
59%
Nearly 3 in 5 small businesses are owed money that's more than 30 days late.
The average business still waiting is owed $17,700. That's not lost. It's an asset sitting on your balance sheet as a receivable, not cash in your account. Money gets stuck in the loop before it circles back to you. Which is exactly what today's article is about.
Source: Intuit QuickBooks, 2026 Small Business Late Payments Report.

▍ ONE TAP

It plugs into your accounting and turns your numbers into one live scoreboard you actually check, instead of statements you open once a quarter and squint at. It reads the handful of numbers that signal health, your margins, your cash, and the key ratios, and marks each one green, yellow, or red with a 12-month trend. At a glance you see what to go fix and what's already working. It's the scorecard Colin teaches owners, made automatic and always on.

We're still building it, and we want to know if it's worth finishing for you.

It's coming to PM Pro. Say you're in and we may bring you in early to help shape it.

▍ THIS WEEK'S MOVE

What: Pick one thing you did last month. A hire. A big purchase. A price change. Just one.

Why: Every decision you make lands somewhere in your numbers. Most owners never connect the two, so the statements read like a foreign language. Trace one decision around the loop and it stops being abstract. It becomes yours.

How: Write the decision at the top of a page. Under it, answer three questions. Where did it hit first, the P&L or the balance sheet? Where did the cash come from or go? What does it do to next month? Do this once and you will never read your statements the same way.

▍ ONE NUMBER

Here's a number most owners never calculate, and it runs your whole cash life: your cash conversion cycle. It's how many days your cash is stuck in the business before it comes back to you. You pay for materials and labor now. The customer pays you weeks later. That gap is the cycle.

For a lot of small businesses it runs anywhere from 30 to 90 days, depending on the work. Don't get hung up on the exact figure, and don't compare it to the shop down the street. Watch the direction. Shrink the gap, collect faster or carry less on the shelf, and you free up cash without earning a single extra dollar.

Roughly: the days your inventory sits, plus the days customers take to pay, minus the days you take to pay suppliers.

▍ WORTH KNOWING

→  "The balance sheet is just for the bank and the CPA." The P&L tells you if you made money. The balance sheet tells you if you'll survive. Your cash, what customers owe you, your inventory, your debt, they all live there. That's where a squeeze shows up first.

→  "My accountant handles the numbers, so I don't have to." Your CPA closes the books after the quarter's over and files your taxes. Useful, and necessary. But nobody except you is watching cash forward, week to week. That's the number that makes payroll.

→  "More stuff means a stronger business." Only if the stuff produces sales. Idle equipment and dead inventory aren't strength, they're cash you can't spend. Assets earn their place by driving revenue. We're running businesses, not hoarding.

▍ WORK WITH COLIN

Coaching is open. A year of monthly working sessions where you build the system with me, not homework. Reply COACHING and we'll find the right fit for where you are. (Not ready for that? A 45-minute Numbers Review is $100 and credits toward PM Pro. Reply REVIEW.)

▍ UPCOMING

The virtual flagship. Six live sessions with Colin, Aug 11 to 27 (Tue and Thu, 2 to 4pm ET). Read any statement, build a 13-week cash forecast, find your real margin, and turn it into a one-page scoreboard. $495. Free for PM Pro.

•  Price for Profit, Not Just to Win the Job. Fri Aug 21, 10 to 11am ET. Colin's pricing hour. $39, free for PM Pro. Register

•  Office Hours with Colin. Thu Aug 14, 10am ET. Members only, in the PM Community.

CATCH UP ON THE SERIES

•  Explain your business in 45 minutes

•  Diagnose your business in 15 minutes

•  Find your owner type in 2 questions

QUICK GUT CHECK

Was this one useful? Hit reply with Nailed it, Useful, or Not for me. One word tells us what to run more of.

PASS IT ON

Know an owner who's great at the work but flying blind on the numbers? Forward this to them.

THE CFO'S TAKE
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Colin King, CPA, CFA · CEO, Profit Mastery

Most owners can quote last month's sales. Far fewer can tell you where the money actually went. That gap is where good businesses quietly get into trouble, and it is what Colin closes today. Here is how a business works, start to finish.

What's the typical reaction to the topic of "accounting" among business owners?

•  Debits and credits (whatever that means)

•  Something my CPA handles

•  Accounting = QuickBooks

For those hoping to build financially successful businesses, the late Charlie Munger put it best:

Why is accounting so important?

When looking at your financial statements or tax returns at the end of the year, those numbers represent all the things you did, all the actions you took, throughout the course of the year

Accounting is the literal output of your day-to-day activities running and growing your business

•  Hired an employee? There's a financial impact for that.

•  Bought a piece of equipment? Financial impact.

•  Opened a new store? Financial impact.

•  Signed a lease? Financial impact.

•  And so on…

With a baseline understanding of accounting, you can translate the "actions taken" into the financial outputs which make up your financial statements.

As your ability to read financial statements improves, you can eventually translate the numbers backward to figure out which actions can be taken to drive your desired financial outcomes (goals).

Accounting is both a record-keeping function and a decision-making tool.

Does this mean you need to understand accounting at the same level your CPA does?

Not at all, but you will need a cursory understanding of the core principles, how things work, and what the numbers are telling you.

Let's start with the basic flow of money in a business…

The life of any business starts on the balance sheet, which stores the things you own (assets) and the funding sources which paid for them (liabilities and equity).

There are two sides to every balance sheet and they must equal at all times. It's a fundamental accounting principle.

Let's say we want to start a business…

We're opening an apparel retailer with a physical storefront and a website to sell online.

To start, we'll need some inventory to sell. Then, we need a store to sell it in and a website to sell on. To take payments, we'll need a point-of-sale system. If it's a franchise, then we'll have to pay the franchise fee. Last, we can't forget about leaving some cash in the bank to fund the day-to-day like payroll.

These are assets.

And we need assets in order to make a sale, any sale.

Side note for service businesses: Yes, you'll need assets too, just fewer of them. Generally, you'll still need plenty of cash in the bank, receivables for uncollected revenue, perhaps some equipment, or technology hardware.

Sales growth generally requires more assets.

We don't magically create these things, we have to pay for them somehow. That's where liabilities and equity (L&E) come into the picture.

Think of L&E as funding sources to pay for those assets.

•  Liabilities consist of traditional loans like a bank loan or line of credit, amounts owed to suppliers (accounts payable), or credit cards.

•  Equity has two main components to it: (1) what you put in or took out as owner of the company (contributions and distributions); and (2) the cumulative lifetime profitability of the business (known as retained earnings).

Back to our business…

Let's say all of the assets we need total $250,000, but we only have $150,000 to invest personally (that's our equity contribution). We go to the bank with our business plan and get a loan for the remaining $100,000.

So we have total assets of $250,000 and total L&E of $250,000 ($150,000 equity and $100,000 liabilities).

Fast forward a few days and we've made a few sales (woo!).

Those show up on our income statement (or Profit & Loss, P&L).

Using effective financial management, we turn those sales into profit.

With those profits we can do one of three things:

1. We can reinvest and buy more assets on the balance sheet. In our example, this would be buying more inventory, improving the store layout, or simply adding to the cash balance. (ASSETS)

2. We could pay off liabilities: repay the bank loan, pay down the line of credit, pay off the credit card, or make those supplier payments as they come due. (LIABILITIES)

3. Or we take it home in the form of a distribution (which is one way entrepreneurs are compensated for their efforts). (EQUITY)

You'll notice the three uses of profits are tied to the three sections of the balance sheet (assets, liabilities, and equity).

This creates a circular flow of money from the balance sheet, to the income statement, and back.

It's how money flows through your business, my business, any business. And it applies to any size company in any industry. We all abide by this financial operating cycle.

A quick recap of this financial operating cycle:

•  We buy stuff (assets)

•  We pay for that stuff with liabilities or equity

•  We use those assets to generate a sale on the income statement

•  We turn those sales into profits

•  We use those profits to either: buy more stuff, pay off liabilities, or take a distribution

•  Rinse and repeat

This is how a business works.

It's a beautiful closed loop system of hard working money.

Hopefully this clarifies the interaction between the income statement and balance sheet. No more looking at a single financial statement in a silo… they all work together to tell the complete story of your business.

▼ The Full Edition

That's the first half. Below, the rest of Colin's take, what to actually do with the loop, plus the worked example that shows where a profitable business's cash disappears, dollar by dollar.

Already a PM Pro member? You're in. The Full Edition is part of your membership, nothing to buy. Everyone else: $10 a month or $99 a year. Tap the button below to keep reading.