Understanding Basic Cash Flow Management

Tuesday, October 6th, 2015 by Mike

TooManyDollars

One important key to better money management is to be able to understand the basic principles of cash flow. Once these basics are firmly grasped, then you can go from there and begin to reduce your debt, make your money go further, and even put some away in savings. Here are some important things you need to know about cash flow management.

The best place to start is to understand your personal cash flow. You do this by calculating exactly just how much money is coming in and how much money is going out. Generally, this is calculated on a monthly basis, which will also allow adjustments to be made more easily since most bills are paid monthly.

1. Start by Preparing A Cash Flow Statement

Start out by figuring out just how much is being spent in a month on all of your bills and other expenses. This needs to include those things that you spend cash for, too, like pizzas, coffees, outings, gas, etc. If it requires cash – or credit – it needs to be added into the figure. Any bills paid quarterly or semi-annually need to be divided up so that you end up with a cost per month and then add that cost to the total of all of your expenses. Ongoing medical costs or prescriptions, which will most likely be variable, should be added, too, after averaging.

The cash inflow that you have is the amount of money coming into your home on a monthly basis. If there are two income earners in your home, then it should be included. Be sure to include money that comes in from child support, alimony, SSI or social security, rent or mortgages, interest, etc. Money should not be included that is sporadic or that cannot be counted on to be there each month.

2. Use Cash Flow Analysis to Ensure Better Money Management

After both figures are calculated, then you can use cash flow analysis to make some wise adjustments. Subtract the amount of cash outflow from the amount determined in your cash inflow. Hopefully, this will leave you with a positive number. If it is, then this means that you are making more than what you are spending – which is a good start. If your outflow is the bigger number, then some quick adjustments need to be made before some serious financial trouble sets in.

This number is a good starting place to help you determine the condition of your personal financial health. If it is negative, then you need to reduce your monthly cash outflow quickly – or, somehow increase your monthly cash inflow. Either way, a negative number means quick action is needed to keep the creditors away and a roof over your head.

3. Divert Positive Amounts into Savings Plans

If you have a positive number representing your personal overall cash flow, then this means that you have some financial health. It probably also means that you should divert some of your excess cash flow into some form of savings account or investment that will let you earn a good amount of interest.

Ideally, for financial security reasons, you want to have money going into the bank on an ongoing basis. Your cash flow statement should show a flow of money into savings that is building up toward retirement, perhaps some long range savings, and also some short-range saving goals.

Cash flow management is more than just recording numbers in cash flow software or on paper. If you use it as a measuring tool to help you build wealth and stop frivolous and short-term spending, you will quickly be able to understand why you could easily wish you had started using it sooner. Through continuing to measure your statement of cash flow, you can make positive adjustments to your money management that will enable you to make the most of your financial situation each year.

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One Response to Understanding Basic Cash Flow Management

  1. How do you account for spending from savings in a monthly cash flow analysis? For example, if you take a vacation one month and use money from your savings to pay for the vacation, the cash flow analysis will most likely show you are negative cash flow for the month because you spent above your inflow (because you had expenditures for vacation). But in reality, you used money from your savings account you already accrued from previous positive cash flow months. So should you remove cash outflow items that are funded from existing savings? What is the best way to account for this in cash flow analysis of a personal budget?

    Thanks,
    EasyInvestingStrateiges

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