Personal cash flow statement- What it is and why you need oneMarch 16th, 2018 by Anchor Bay Capital's Investment Team
Do you know where all of your money goes? Do you wonder why as soon as you get paid, the money just seems to disappear leaving you broke until the next paycheck? And what about saving for the future, or do you plan on working for the rest of your life? Any successful business has a budget and so should you. If you don’t have a personal budget, then you need to create one. Think about it; a business has to track income and expenses to turn a profit successfully. If companies ran their budgets the same way most people keep their budgets, most of them would fail. This is why one of the most important factors of your financial success is understanding what cash flow is; and why it’s a must to have a personal cash flow statement.
What is a cash flow statement?
The Cash Flow Statement is a financial report that presents a detail of the flows of income and expenses that a company or individual has in a given period. Some examples of income are wages, profits from sales, debt collection, rent, a collection of loans, interest, etc. Examples of expenditures or outflows of money are the payment of bills, payment of taxes, payment of salaries, loans, interest, debt repayments, utility payments, etc. The difference between income and expenses is known as balance or net flow. Therefore, it constitutes an essential indicator of the company or individual’s liquidity during that period. If the net flow is positive it means that the income of the period was higher than the expense; if it is negative, it means that expenditures were higher than income.
What constitutes a cash flow?
Cash flow is characterized by giving an account of what values enter and exit the accounts of an individual or organization. The Cash flow Statement differs from an Income Statement in that it is not an indicator of profit or loss. However, the importance of cash flow is that it allows us to know the liquidity of an individual or an organization quickly. So a quick view of a cash flow statement will assist with decisions involving spending more money or less money in a given period of time.
Why you need a personal cash flow statement
When we think of personal finances, the cash flow statement becomes vital because it allows us to review the future income and expenses that the person will experience in a given time horizon. Just like financial planning in corporate finance, reviewing a personal cash flow statement regularly should create action items that one should take to affect their financial outcome.
Just as companies can forecast their future finances, individuals must also do so to avoid future risks and surprises. We make so many financial decisions on a daily basis and the vast majority of people do not have an action plan to help make these decisions. If you are one of these people and you want to do something about it, I recommend reviewing your personal cash flow statement on at least a quarterly basis. By controlling where your money flows you create the opportunity to make your money work for you. As you start to guide your cash flows toward your personal priorities and minimize unnecessary expenses and flows toward low priority items, you will start to experience a positive change in the way you make your financial decisions. The results of smart financial decisions will be accomplishing what matters to most to you financially.
3 steps to get started with a cash flow statement
- The first step to financial wellness and then freedom is taking responsibility for your finances. This means that every buck starts and stops with you. There is no one to blame for bad financial decisions except you; and once you take that responsibility and decide to do something about it, the only thing that can stop you from reaching your goal is you!
- Building wealth is not something that happens on a whim; it takes patience, the ability to make sacrifices, and a plan, so the second step is to actually make a cash flow statement. A simple cash flow statement can be constructed by reviewing past income and expenses and projecting these values out into the future over a certain time period. Your first approach may not be perfect, but it will give you a good idea of where you stand financially. It will also provide a good starting point to alter your cash flows. There may be expenses that seem outrageous or you may have reminders of subscriptions that you haven’t accounted for. You may have insurance premiums that have increased or services that you don’t need anymore. Once you can see them, this is the time to decide what needs to be cut or changed so that you can reach your financial goals.
- The third step is to not take it on alone. The effectiveness of a cash flow statement relies on the analysis of the flows and the action items that the analysis creates. This is where it is helpful to have a Certified Financial Planner™ professional monitor your cash flow statement with you. Think of hiring a financial planner as hiring your own personal CFO (Chief Financial Officer). You are in charge and you ultimatley make the financial decisions, but a good personal CFO will show you the important details that you need to consider to achieve your financial goals.
At Anchor Bay Capital, Inc. our financial planning process starts with cash flow as the foundation for each plan. As we monitor your financial plan we include a periodic review of your personal cash flow statement and ongoing discussions of what steps to take to really affect your financial future. Check out the video below for a short tutorial on how you can track your cash flow statement with our online client portal.