PSU Insight

Writing Your Business Plan

Your Cashflow Analysis

As you've seen, a budget offers a good overview of where your business stands financially. Properly done, it contains a wealth of valuable information. But, as you’ll see now, a budget can also be horribly misleading if used alone.

Instead of a budget, let’s consider a Cashflow Analysis for your business. A cashflow analysis is similar to a budget except that it covers a series of shorter time frames, and the details of your income and expenses are unimportant.

Your cashflow analysis should describe your anticipated monthly income and expenses over the next year. (Some businesses require a weekly — and sometimes daily — cashflow analysis, but speakers can generally work quite well with a monthly analysis.)

For a monthly cashflow analysis, you need three figures for each month of the coming year — your income, your expenses, and your net income (or loss) for the month. It sounds like a lot of work, but you really only need to come up with 24 numbers in all — your estimated income for each of the next 12 months, and your estimated monthly expenses for that same period. The third set of numbers is obtained by simply subtracting each month’s expenses from the month’s income.

The information that a cashflow analysis provides is sometimes surprising and always invaluable. Let’s consider an example.

A cashflow analysis probably works best as a table For instance, consider this Cashflow Summary (based on the same hypothetical business as the previous budget analysis) —

Income Expenses Profit / Loss
January $ 1,000 $ 5,000 $ (4,000)
February $ 1,500 $ 9,000 $ (7,500)
March $ 2,500 $ 8,000 $ (5,500)
April $ 4,000 $ 5,000 $ (1,000)
May $ 8,000 $ 5,000 $ 3,000
June $ 8,000 $ 7,000 $ 1,000
July $ 10,000 $ 7,000 $ 3,000
August $ 10,000 $ 5,000 $ 5,000
September $ 13,000 $ 5,000 $ 8,000
October $ 12,000 $ 4,000 $ 8,000
November $ 15,000 $ 5,000 $ 10,000
December $ 15,000 $ 5,000 $ 10,000
Total $ 100,000 $ 70,000 $ 30,000

Let’s consider this table column by column (that is, money flow throughout the year). In this example, income (column 2) starts low and then climbs steadily throughout the year. This is certainly not an unusual experience for many growing businesses. In fact, the “obvious” conclusion is — because the speaker is actually making money each and every month, the speaker is doing quite well!

In the next column, you see that expenses are slightly higher at the beginning of the year. Again, this is not at all unusual. No obvious problems… yet.

But now let’s look at the last column — the speaker’s net income, month by month. It’s immediately apparent that this speaker’s business is losing money for the first four months of the year.

Granted, in May she makes a profit of $3,000. But if she borrowed money to survive on for the first four months, she’s already $18,000 in debt. Assuming she pays back her debts as soon as possible, it’s late September before she actually keeps some money for herself.

So the Cashflow Analysis paints an entirely different picture from the annual budget —

As her annual budget indicates, she ends up making $30,000 for the year for her efforts. That’s good.

But that’s dependent on (1) her being able to acquire $18,000 to cover her anticipated expenses earlier in the year, and (2) her being able to survive until she begins showing a net profit for the year.... in September.

You can see that a good cashflow analysis can provide a wealth of information that simply can’t be derived from an annual budget. A budget is important, but a good cashflow analysis is essential for your business to be successful.