One of the most common reasons businesses fail is due to lack of understanding of cash flow. The same can be said about your household’s personal financial statement. So what is this cash flow concept, how does it apply to you, and what are some ways to improve yours? In Part 1 of this two-part article, we explained explain what cash flow is and how to determine your cash flow. In Part 2, we’ll give you some ways to improve your cash flow.
Identify your challenges. See if you have months where more cash is going out than is coming into your bank account. This is often when large bills are due. Try to balance these known high-expense months out over the year if at all possible. Common causes are:
Property tax payments
Car and homeowners insurance
Annual income tax payments
Build a reserve. If you know there are challenging months, project how much additional cash you will need and begin to save for this reserve in positive cash months.
Cut back on annuities. See what monthly expense drivers are in your life. Can any of them be reduced? Can you live with fewer cell phone add-ons? How about cutting costs in your cable bill? Is it time for an insurance review?
Shop your current services. Some of your larger bills may create an opportunity for savings. This is especially true with homeowners and car insurance.
Don’t confuse savings with cash flow. Think of your savings as the accumulation of positive cash flows from prior months. A high savings balance can often mask a monthly cash flow problem where more is going out than is coming in over a period of time.
Create savings “expense” to add to cash flow. Consider adding a “bill to yourself” in your cash outflows. This money saved is a simple technique to create positive cash flow each month to build an emergency reserve.
One of the most common reasons businesses fail is due to lack of understanding of cash flow. The same can be said about your household’s personal financial statement. So what is this cash flow concept, how does it apply to you, and what are some ways to improve yours? In Part 1 of this two-part article, we’ll explain what cash flow is and how to determine your cash flow.
Cash flow defined
Cash flow equals cash coming in (wages, interest, social security benefits) and subtracting the bills you pay. Unfortunately, calculating cash flow is never that easy. Some bills are due weekly, others monthly. Some large bills come quarterly, or annually. Understanding this flow of cash is the first step in knowing how to improve yours.
Create your cash flow snapshot
Before improving your cash flow, you need to be able to see it. There are many online tools to create a map, but you can also take a snapshot of your cash flow using a monthly spreadsheet.
Put each month across the top of the spreadsheet with an annual total.
Note all your revenue and corresponding expense descriptions in the left-hand column.
Enter your income and bills by month. Create a monthly subtotal of all your inflows. Do the same for your expenses or cash outflows. Then subtract the expenses from income. Positive numbers? You have positive cash flow. Negative numbers? You have negative cash flow.
Create a cumulative total for the year to see which months will need additional funds and which months will have excess funds.
Check out Part 2 where we list various ways to improve your cash flow!