So that last one was a simple case, but let’s take a more common case. It doesn’t have to get that complicated — remember this is planning, not accounting — but I do want to deal with some of the more important issues. So let’s create another case.

I can’t explain cash flow without income and balance. Remember, I did say that the cash flow was what brings the two together. So let me show you some samples. Here’s the hypothetical income statement:

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Notice that in this case you can see how we’ve divided sales into cash sales, in the top row, and sales on credit, in the second row, and that those two rows sum to total sales. Normally we wouldn’t show that division in an income statement. I do it like this for this example, because it helps me show you what’s going on.

Now let’s look at the balance sheet. This is the starting balance for the sample case. In your own plan, you set up starting balances as part of your startup funding, or as the ending balance of your last plan. For now, here’s the example.

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I’m going to use these two samples to show you how cash flow brings them together.

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Tim BerryTim Berry
Tim Berry

Tim Berry is the founder and chairman of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry.