Budgeting and Cash Flows: the Absolute Basics

When I’m not working, writing articles for this website, making (often vain) attempts to keep my garden alive, learning German or knitting*, I volunteer with an organization called Paamonim.  We work with families to teach them personal financial management skills.   Anyway, this week my team leader had the team come in for a periodic meeting in which we bonded over tips and tricks in the personal financial counseling biz.   Then she asked a question:  what is the difference between a budget and a cash flow?

Dead silence.

And then I spoke up.

Simple!  A budget is WHAT.  A cash flow is WHEN.

Bingo!

Let’s review that again.

A budget is WHAT.

A cash flow is WHEN.

Or in other words.

A budget is how much money you are earning and how it is being earned and how much money you are spending and on what you are spending it.  A cash flow is when that money is coming in or going out.  The two are not identical and forgetting this can mean that you have a lot of bills to pay and no money to pay them with.

To give you an example, let’s imagine you have a company that sells…thinking here…robot teddy bears.  You have the bears manufactured in China, ship them to your home country and sell them. And they are leaping off the shelves in their delightful, metallic and clank-y fashion! At the end of the year, your annual profit & loss statement looked a bit like this.

You have a net profit of 25,000.  Not bad, though why anyone would want to buy metallic non-cuddly teddy bears is beyond me. But never mind that!  What do I know? I am, after all, a fuddy-duddy! Net profit means you are, well, profitable! Which means you can pay your bills and stay in business! Right?

Hmmm….let’s drill down a bit into that revenue and expenses.  This is what your P&L looks like on a monthly basis, and with a bit more detail.

(No, these numbers are not intended to be an even slightly realistic depiction of a robotic teddy bear company’s expected costs.  It’s 10 PM, it’s been a long day, and I’m just picking stuff out of the air. )

And the above in graph form:

Now, as you can see, there are a few months in which the sales are weaker (post-Christmas, summer holidays) and in these months, expenses exceed revenues.  But these deficits are generally manageable and in most months—and overall—the business is in the black.

But…that’s still just the budget. What happens when we look at cash?

And the graph for this one?

Massive peaks and valleys. Massive deficits five months out of twelve.  And an overall deficit of 28K. I hope you have some financing lined up to tide you over!

Moral of the story?  It is not enough to know what.  You also have to know when.  We are going to talk more about this in the next few posts.

 

To learn more about budgeting your sales cycle.

 

 

* Yes, I rock the  grandma hobbies.  Laugh all you want; I’m the one with the cool sweaters.

 

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