Managing money is like preparing for a test. To prepare for an exam, we check the syllabus to be covered, study the concepts, practice the topics relentlessly, and then brace ourselves to appear for the battle. But sometimes, even after all the hard work, we fail to achieve the results that we expected. What do we do then? We try again.
Similarly, if we talk about money management, we put in hours analysing different options that are available for us, thinking where to invest and how to invest, preparing a budget to control expenses every month, repeating the same process again and again. But, why is it that often our money doesn’t multiply the way it should? Even after so much deliberation, we are still left with little or no funds at the end of the month. We need to adopt a more solution-oriented approach to tackle these issues. Rather than going through this process with our salary again, let’s try something different this time. Let’s check our cash flow. Don’t know what a cash flow is? Don’t worry! Read on to find out.
Just focusing on when our expenses are due or another loan taken won’t help; we need to focus more on how to increase our cash inflow to deal with these issues. Just like our lives need to be organized and decluttered for better efficiency, our money management process should also be organized.
An effective way of doing so is maintaining a personal cash flow management system. Cash flow, as the name suggests, means the direction in which our cash is moving. A cash flow statement, therefore, records all the cash related transactions that one may have in a particular period. This is a system that shows the cash position at the end of a period and how a particular financial decision has impacted our cash balance. Our finances have both cash inflows (receipts) and cash outflows (payments). Net cash flow is what we get after
deducting total cash outflow from total cash inflow. It can be positive or negative. Positive net cash flow means that our earning is more than spending. This is what keeps our finances going. The ultimate goal is to keep money coming in. Negative cash flow is when our expenditure exceeds our income. It can put us into debt, add to our losses.
An added effort? One might think that with so much to do for maintaining finances, this might be an added effort. What we need to understand is no matter how much we invest, earn, or save; till the time we don’t pick the correct direction we should be headed to and can capitalize on it, all our efforts will go in vain. Consider it this way. Instead of adjusting uncomfortably in a small blanket, it is better to get a bigger blanket in the first place. Similarly, instead of scrambling to cut expenses when funds are less, try to gauge the amount of cash flow required to cover those expenses.
- Just earning money is not enough. Understanding where our money is being spent, how much of it is being spent and why so, is equally important. A cash flow management system helps us keep a track of all the sources where we earned from, where our money went, and zero down the options that worked the best for us.
- What we see is what we often believe. With an efficient cash flow management system, we can actually ‘see’ or visualize our cash inflows and outflows. It provides adequate information on our current cash and liquidity position and helps us make decisions that may enable us to achieve the financial goal we have set for ourselves. It also lets us compare the cash flow of different months to understand how our cash flows every month.
- It helps to have better control over our finances and take remedial measures once we figure out the lacuna in our processes. It can help us know if and to what extent are we deviating from our goal. It also helps us identify opportunities which can be put into good use with any surplus that is generated.
- Money management can be overwhelming at times. A cash flow management system helps break down our otherwise complicated financial transactions into a more convenient, comprehensive, systematic, and manageable form of record.
- Setting up priorities is itself a priority. A cash flow statement can also help us prioritize and reprioritize our financial decisions. It can pinpoint whether a particular decision taken has fared well for us or not. It can also serve as a basis on which we take a call on our choices. It can help us decide whether a career change, a house purchase, or another vacation is feasible for us or will create an irreparable dent in our finances.
A cash flow statement can certainly not predict if we will become a billionaire in the future, but it can surely tell us if we are on the right path to becoming one.
The ‘not-so-secret’ ingredients of cash flow: To build a cash flow statement, we need to check our sources of income, expenses, savings and investments. Sources of income can be salaries, bank interests, dividend from investments, capital gains from the sale of financial securities, revenue from the sale of assets, commission and fees. It can be our pocket money or any other additional income as well. Basically, anything that generates income for us can be added. Expenses could be on essentials, fixed expenses like rent, electricity, any debt repayments or interests to be paid, investments made, taxes or discretionary expenses like entertainment expenses, etc. Income might also go into savings and the building of an emergency fund. It varies from individual to individual and depends on what one chooses to spend their money on.
Positive cash flow: The answer to our problems? For maintaining positive cash flow, we need to ensure that we earn more than what our expenses are. It helps us plan for a comfortable retirement since that is the time when income sources dwindle, and expenses might shoot up. Having a positive cash flow system is crucial for pampering yourselves with all that you wish for- a vacation home, luxury cars, treating your family with high-end gifts, or the Europe trip that you are dying to take. How to build that system? By putting in extra efforts to create more streams of positive cash inflow for our expenses. It’s simple- the more we earn, the more we have. Work till 60 or retire at 40, it is your wish after all. Know how to plan up for a ‘dream retirement’.
What else does one want than to have a relaxed sleep in the comfort of their home knowing that their family’s future is secured? A strong, positive cash flow signals that we are in a position to repay our debts and can afford to take a comparatively riskier approach while taking lifestyle and financial decisions. Negative cash flow, on the other hand, could be a warning sign for any ongoing financial trouble that might have been overlooked. It puts us on alert to figure out what is triggering our finances and needs to be rectified. Positive cash flow is essential to ensure that our needs and wants for today as well as for our future are fulfilled. It lets one take a breather from the financial chaos that the world is set in.
Maintaining cash flow is a continuous process. It is that one extra step we can take for a more robust financial health. It is like that morning walk we put off for that extra hour of sleep but can actually work wonders for a better start to our morning. So wake up, and feel that fresh air of financial stability, wellness and freedom.