Cash Flow Advisor - A Guide to Cash Flow
Cash flow is essentially the amount of money that flows in and out of a business or household. Cash coming in is represented by inflows and cash going out is represented by outflows. For households, understanding cash flow is vital in maintaining financial health. Positive cash flow can be a sign of healthy spending and savings habits while negative cash flow can be a sign of overspending.
It is not uncommon for people, even high earners and high net worth individuals, to look at their bank and credit card statements each month and be surprised at how much money they spent. Getting a clear picture of your cash flow situation can help you better understand where your money is going, improve your saving and help increase the chances you reach your short-term and long-term financial goals.
A Guide to Cash Flow
What is Cash Flow?
Cash flow is made up of inflows and outflows. For households, cash inflows can include salaries, pensions, interest from savings accounts, dividends and realized gains from investments, the sale of various types of property and Social Security benefits. Cash inflows are basically anything that brings in money. Cash outflows are any expenses and can include rent or mortgage payments, utilities, groceries, travel expenses and anything else that costs money.
Keeping a detailed accounting of your cash inflows and outflows during a certain time period will help you understand what your net cash flow is for that time period. You can determine your net cash flow by subtracting your total cash outflows from your total cash inflows. If you have a positive net cash flow during a certain time period, you brought in more money than you spent. If your net cash flow is negative for a given time period, you spent more money than you brought in.
Why Does Cash Flow Matter?
Having a clear picture of your cash flow situation is a vital component in understanding your overall financial health. You may be a high-income earner and have a significant net worth, but without understanding how much money you have coming in and going out, you could be spending down your assets at a greater rate than you realize. Overspending can also lead to debt.
Understanding your cash flow is also beneficial in helping you determine if you can afford to save more toward your financial goals. If you have excess cash at the end of the year, and your current situation allows, it might be a good idea to consider allocating those funds to a financial goal, whether it is building up a cash reserve or contributing additional savings toward retirement or other short-term and long-term goals.
A Tool for Success: Cash Flow Statement
A personal cash flow statement is a tool that can be used to summarize your cash inflows, outflows and net cash flow. It will essentially show you how much money is coming in against how much money is being spent. A cash flow statement can be a valuable tool in budgeting and can help determine if you have a positive or negative cash flow.
How Do You Do a Cash Flow Statement
To complete a personal cash flow statement will need to include all inflows. This can include salaries, pensions, interest from savings accounts, dividends and realized gains from investments, the sale of various types of property and Social Security benefits. You will also need to add all outflows including rent or mortgage payments, utilities, groceries, travel expenses and any other expenses. First, pick the period of time you want your cash flow statement to reflect. Then subtract your outflows from your inflows over that timeframe, and you will get your net cash flow for that period.
Tips for Cash Flow Management
Creating and sticking to a budget is a great way to manage your cash flow. Budgeting helps you visualize what your spending priorities are and if there is a need to cut back. This type of spending plan can help ensure you have enough money to pay for what you need and what is important to you. Budgeting helps you keep track of your expenses, reign in spending if needed and ultimately save more money for your financial goals. You may find you need to cut back on some discretionary spending in the short-term in order to reach your long-term financial goals.
Try out a Financial Planner
A financial planner can be a valuable asset in helping you understand your cash flow needs both now and in the future. Through cash flow analysis, a financial planner can also help you understand your current financial situation and help you build a workable budget that can help you reach your short-term and long-term financial goals.