Independence by Design™

·E507

#507: Pat Hobby | Get Ready for Q4 Budgeting with the Model That Predicts Your Cash (Replay)

August 20
1h 39m

Episode Description

Budget season is about to open, and I want this conversation back in front of you first. Your CPA says you had a great year. The bank account in March disagrees. That gap is what happens when you budget the income statement and nothing else. Pat Hobby share-screens a real three-statement model and shows the math: how the income statement, balance sheet, and cash flow statement link together, where the bridge row sits between the CEO seat and the owner seat, and how a $2.9M cash position goes negative $1.5M when days sales outstanding drifts from 36 to 75. Same revenue. Same profit. No cash. The point isn't to turn you into a CFO. It's to show you what good looks like so you can judge whether your team is producing it. The 2027 budget season kicks off September 15 with our Strategic Planning & Budgeting workshop: predict your cash, lock your ownership goals, get the three functions pulling toward the same numbers. This is the on-ramp. This originally aired as episode 462: https://independence-by-design.castos.com/episodes/462-budget-season-2026-part-2-from-pl-to-cash-flow-the-model-every-owner-needs-pat-hobby

Top 10 Takeaways

  1. Sales drives every other line. You can't budget margins, payroll, or working capital without locking in revenue first.
  2. The income statement only tells part of the story. Cash is what runs the company, not net income.
  3. Your three statements are mathematically linked. If you only budget the income statement, you can't predict your cash position.
  4. Cash flow from operations is the bridge row. Above it the CEO is accountable. Below it the owner allocates.
  5. A good budget has a 50/50 shot of being hit. If you always beat it, you're not budgeting, you're sandbagging.
  6. Don't change your budget mid-year. Forecast separately. Changing the budget just excuses bad behavior.
  7. Build payroll person-by-person, month-by-month, fully burdened. Skip the work and your income statement is fiction.
  8. Days sales outstanding is a lever. Drop it from 75 to 36 and your cash position swings by millions.
  9. Cash is the plug. Once the balance sheet ties out, the cash flow statement tells you the real story.
  10. Once you see what good looks like, the question shifts from "is this possible" to "what has to be true."

Chapters:

[00:00] Why Sales Comes First in the Budget

[02:30]  From Sales to Revenue: Building a Realistic Budget 

[07:16] Cash Flow From Operations: The Bridge Between CEO and Owner

[19:08] Why Net Income Doesn't Tell the Whole Story

[24:21] How the Three Financial Statements Connect

[39:51] Budget vs. Forecast: Why You Shouldn't Change the Budget

[44:29] Building Revenue From the Bottom Up

[49:07] Building Payroll Person by Person

[01:03:51] Cash Is the Plug: Making the Model Tie

[01:08:13] DSO and the Cash Conversion Cycle

[01:18:21] From Sales to Owner Cash: Making Better Decisions

[01:29:38] What Good Looks Like: What Has to Be True

Sound Bites

"The income statement only tells part of the story. That tells the revenue and expenses for a period of time, a month, a quarter, half a year, a year. That is not the whole story." (@00:30:00) — Pat Hobby

"Cash flow from operations is the number they've got to be held accountable for." (@00:24:02) — Pat Hobby

"I'm not a fan of changing budgets. We're running 20% behind, so let's just change our budget for the rest of the year. Oh, we're right on budget. You're just excusing bad behavior." (@00:46:20) — Pat Hobby

"We grew like gangbusters, and we have no cash, it's right there. We have no cash." (@01:20:53) — Pat Hobby

"It's not acceptable to be in the dark." (@01:37:42) — Pat Hobby

About This Episode

Pat Hobby is a fractional CFO with private equity and operating experience who has built three-statement financial models for owner-operators across industries. He's a regular collaborator with Ryan and one of the few CFOs who teaches the model the way Ryan thinks about it: income statement, balance sheet, and cash flow tied together, with cash flow from operations as the bridge between the CEO seat and the owner seat. Pat share-screens through a real budgeting tool and walks Ryan through the math, the levers, and the seats. Originally aired as Ep. 462; rereleased as the on-ramp to the 2027 budgeting season.

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