S7E4: Simple Finance Wins: Cash Flow Forecasts, Budgets, and Self-Pay for Business Owners

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Ever looked at your profit and loss statement and thought, “Why am I broke if I’m profitable?” You’re not alone.

In this episode of Cash Flow with Pam Prior, Pam tackles real questions from entrepreneurs—like:

What’s the difference between a budget and a forecast?

How do I calculate cash flow when I don’t have money?

How do I know when cash is coming in and going out?

Pam keeps it simple, cutting through financial jargon so you can see your money clearly, plan with confidence, and finally breathe easier about your business finances.

Whether you’re running lean or scaling fast, this episode gives you the tools to stop guessing and start growing.

Transcript

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Foreign and it's cash flow time. Welcome back. I'm so glad you're here, especially as we continue our Kiss series, which is all about making the answers simple. Finances are complicated enough. You don't need the answers to your questions to be just as complicated. So we're keeping it simple here. I'm going back to my list of questions. What I suggest you do while I do that is make a note to go back and look at our first three episodes because not only are we covering the most common questions I get from entrepreneurs, but we really have kept it simple. I got Francis behind the camera. I've got one over here. And when I start to get complicated, they start waving in the background. So I know we're keeping it simple. And the more important thing is, and not just answering the questions, but I'm giving you some practical tips on how to implement those answers. Because a lot of times people say things like, oh, you should have a six month emergency balance in your savings account. Well, that's nice. What does that mean? How do I calculate it if I don't have money? How do I build it? And guess what? We addressed that in the last episode. So I do hope you go back and listen to those questions as well. What we'll do is drop what the questions are for each episode right here in the notes. You know which questions are being answered each time. So this week we're moving on. And if you remember from prior episodes, I literally look at the question and then answer right away without even thinking about it. So I'm going to see where we left off here. What's the difference between a cash flow forecast and a budget? And I get this a lot, a lot of people, like hate that term budget because it feels so constraining. I call it a spending plan rather than a budget. Just, just for, for your purposes, if budget's one of those words that makes you cringe, just call it a spending plan. But great question. You hear the word forecast, you hear the word budget, what the heck is the difference? Well, the way I think about it, or the simplest way to think about it is that a budget is kind of a plan for a period of time. You know, what you think is going to happen over, let's call it 12 months or what you want to have happen over 12 months. And so you put a budget in place that shows, hey, I'm going to make this much money each month, I'm going to spend this much money each month, I think. And then you look at it each month after you Know what you actually have made and what you've actually spent and you go, oof, I made a lot more money than I thought I was going to make, so I'm going to spend a little more next month. So you adjust that budget for the remaining months. Okay, so it's, here's what I think is going to happen, and I'm going to compare what actually happens to what I thought was going to happen. And, and if I can make some adjustments because I had good news or I had bad news, I can do that. That's how I think about a budget or what I call a spending plan. It's a spending plan based on how much money you think you're going to make over a period of time. Okay, that's the one sentence answer, what's a forecast? When I think of a forecast, I think of a much more real time look at what's actually happening in the very foreseeable future. Some things you kind of know a little more than you know when you're putting a budget together. For example, when I'm thinking about a forecast, I'm going to look at the next 12 weeks and I'm going to look at cash. I don't care about the profit and loss statement. I don't care about am I profitable? Am I not profitable at this point, I just want to know when's my cash coming in the door? When's my cash going out the door? And I call that a cash flow for forecast. Now, to make this simple, what does it mean? It means I have a line on a spreadsheet or a piece of paper, And I have 12 columns. And I say, okay, first line says income. And in the first column, how much money am I going to get in this week? How much am I going to get next week? How much am I going to get the week after that? That's what each of the columns is. Weeks one to 12. And you're going to sit there and say to me, I know because I've heard it. I have no idea. I can't guess that I've been there. I know it's hard and you're going to be wrong about most of it, but you know a lot more than you think you know. So what I suggest you do so that you get a little more comfortable around how much money is going to be coming in over the next 12 weeks is look at your bank statement or your bank account online for the last 12 weeks and look at the patterns. How much money does come in? How many sales do I tend to make a month. How quickly does that cash get to me? What? Or I know I have a monthly membership. And so for sure I know I'm going to get $1,000 a month. And you throw that in there. But you really only put into the forecast the numbers you're really comfortable, you're going to see. You know it because it's what's already kind of happening in your business. You're not counting on major growth. You're not counting on some magical thing happening to increase your income in the forecast. You're putting in what you kind of already know, then the same thing for what you're going to spend. And this one is even easier than the income one, quite frankly, because most of your expenses are going to be fixed. Most of them you pay month in and month out. So when you look at your bank statement, you can really clearly see on the first week of the month, I pay my utilities bill. In the second week of the month, I pay my mortgage. The third week of the month, I pay my employees. Whatever those things are. You can find that pattern by just glancing at your bank statement or your bank account can fancy that up if you want to. If you're a spreadsheet wizard, download the data and whip it into a pivot table and do it that way. But we are keeping it simple here. It's literally just print out that bank statement and look at it. That's how you generate the forecast. And then kind of like with a budget, this. The two things have this in common every week. I want you to go back to that forecast and say, okay, how did I actually do? Because here's the only reason you're doing that. Say that you predicted you were going to have$1,000 coming in and $500 going out this week. But for whatever reason, that $500 going out didn't go out, somebody didn't get a bill to you in time or something like that. You actually want to go then and adjust the next 12 weeks of your forecast so that, you know, hey, I'm still going to have to spend that money. I don't want to just leave next week. There's as if I don't know that that money's going to be coming out next week because they're going to bill me at some point. So that's the cool thing about both the budget and the forecast. Budget is an unknown forecast is a little less unknown and much more compact. It's 12 weeks instead of, for example, 12 months. But for both of them, you do Want to go and look each week or each month. In the case of the budget, how did I do versus what I expected? Because that's going to do a lot for you. That's going to do so much for you in your business, both managing cash flow in the short term and seeing what's happening in the long term. So a side effect of this is you're going to learn a lot more about your business by just doing this quick exercise every week or every month. But the real reason that you do the comparison is so that you can make sure when you look ahead 12 weeks, you know you're not going to hit a pothole. Or if there's an opportunity you may not, you'll know about it ahead of time. You're like, oh my God, if this keeps going like this the way I think it is, I'm going to build up some money. So to kind of link this to one of the questions in last week's episode, I'm going to build up some money by week six. Hey, I'm going to take some of that, put it in the savings account for my, my emergency fund. So you don't want to miss the opportunities to take money and do other things with it. You also don't want to miss the potholes where you might be doing things a little faster than your income is going to allow for. So those are, to me, the differences between a budget and a forecast. I promise you, if you ask 12 different accountants, you'll get 12 different answers. But to me, that's the way I would as a business owner. Think about it. One's a long term fixed plan that I really don't know so much about. One's a short term. I know a lot more about this, but I really want to make sure I don't miss any opportunities or fall into any potholes. So there's that question. Great question, and one of the most common ones that I get. Okay, now let's see. We're on to the next batch of questions here. Oh, this is a good one. What's the number one sign that my cash flow is in danger? I'm glad this question is here this week because it ties to the answer we kind of just gave. If you're not looking out, say, 12 weeks and trying to figure out what your cash flow is, might do. And by that all I mean is, like I said, how much money is going to come in each week? How much money is going to go out each week straight off your bank statement? If you're not looking at that, then you, you can't answer this question. You can't know when your cash, when, whether you've hit a cash flow danger sign or not, because what happens is once you've got this forecast and you know what you think is going to happen over those 12 weeks and every week you're going, did that happen? Yes, it did. No, it didn't. Did that happen? Yes, it did. No, it didn't. If you're doing that every month or every week rather, you're going to know immediately if there's a sign of cash flow danger. And the reason you're going to know that is you're going to look way out there at the sixth week and go, holy cow, if I keep going like this, I'm going to be bouncing a check or not be able to pay my bills. That's the best way to know if you're in danger. What happens to most entrepreneurs, unfortunately, because they don't have this just quick 12 week snapshot look at what's going on, is they find out either the day after the check bounces or the day that the creditor comes and says, you have to pay me everything right now that they've got a cash flow problem. So the very simple answer to that question, how do I know if my cash flow is in danger? You do a forecast and you make sure that when you look at each of those columns, you're always in your. The total balance in your checking account is increasing or staying level over time, but not decreasing. If you see it decreasing, if you add up the week two, week one, week two, week three, four, week five, and at the end of week five, your cash account balance is lower than it was when you started. That's a pretty sure sign you're heading for cash flow danger. Now there are tons of ways to get out of cash flow danger, but this question is simply, how do I know if I'm in cash flow danger? So just to recap, you do a 12 week cash flow forecast. What's coming in, what's going out, you add or subtract that amount each week from your current account balance. So I'm going to increase it by 2000 next week. The next week I'm going to decrease it by 1000. The next week I'm going to increase it by 5000. And you see what that's doing to your bank balance. And if by week six your bank balance is lower than it is today, might be a sign there's cash flow danger. Not necessarily, but there might be. It could be all sorts of things. Could be you're investing in growth. It could be that you've got some higher turnover than expected from clients, but it's going to recover. But it's the first hint, the first flag, I'll call it a yellow flag, that there might be something to look into. Hope that helps. That was a great combination of questions to have on this episode. So I'm glad those two were back to back. Okay, Should I pay myself or the bills first? Love this one. And I am a little bit. I will admit this is a biased answer. And I'm talking about people in business now, okay? And it is a biased answer. And I'll say right out of the gate what Profit first says. If you're in business, pay yourself first, okay? Before you pay bills, before you pay other people, pay yourself first. I will also tell you that, myself included, sometimes this is the one place most entrepreneurs, the one step most entrepreneurs pick. And like anything else, they dive into the business and they're focused on the business. They're like, oh, I can sacrifice this month. I can sacrifice this month. And it grows and it grows and it grows and it grows. And as the business grows, instead of then redirecting money back to pay yourself, you're like, oh, well, I've got all this stuff in place. I'm going to just keep it going and growing. And it's kind of similar to, like, my one biggest regret, just to give you an example in life, my. I don't have many regrets. In fact, very, very few. But one of them is when I started work at science. 17 years old, there was a 401k at my company, and they matched 3%. And I and my stupid youth spent every dollar I earned on whatever it was I was doing right out of the gate when I started working. And instead of putting that money in the bank and going ahead and doing the 401k first, pretending I never even made it, pretending that that money did not exist if I had done that on day one. I'm not even going to do the math for you because I've done it for myself. And I'm like, holy cow. But if you do that now, the difference it will make in your life when you're down the road, five years down the road, 10 years down the road, 20 years down the road, it's exponential, okay? It doesn't go up in a straight line or up in a straight line. It goes up like this. So definitely pay yourself first. And I will tell you the hardest thing to do with an entrepreneur for an entrepreneur is after you're already in the game than figuring out how to pay yourself. But I will tell you that even though it's hard, it's the most important thing you can do. It's more important than your emergency fund. It's more important than growing your business. It's more important than anything else. Even if it's only a small amount you're paying yourself. You need to do that for the psychology of it. You've got. You've been investing all this time, money and energy into this thing. Even if you just need to know that at some point money comes back out to you, okay, that it's. That there's a reason financially that you're doing this. And I'll tell you what, that's important. Whether you're in a not for profit or in a for profit business, because not for profit businesses. All that means is that the business itself isn't like continuing to create wealth if you're working in a not for profit. Every executive director of a not for profit that I know makes a salary because it takes a person's time, money and energy to run that not for profit. So not for profit doesn't mean you shouldn't be paid. Not for profit means that the business itself shouldn't be continuing to make money. Any money the business is making, you should spend on the business after you pay your staff. And guess what? Your most important staff member when it comes to finances is you. So that's a wrap for this week, I think. Three really, really good questions. I hope this was helpful. We're going to continue the series because KISS is going to get the answers to some of the questions entrepreneurs are sometimes afraid to ask out to you. If you like this episode, please like subscribe and share it with anybody else you know that's in business that needs some very short, practical answers to the questions about their business finances. Take care. Have a great week. We'll see you next time.