What is Cash Flow and Why is it Important?

By September 12, 2019 No Comments

Often considered as just for businesses, personal cash flow is an essential part of managing your money effectively. Learning how to manage your cash flow and building a cash flow statement can help you get a bigger picture view of your financial situation. 

What is cash flow?

In simple terms, cash flow is the amount of money that is moving in and out of your accounts. Picture your bank accounts, when there is more money coming into the account than there is going out then your cash flow is positive. When the situation is reversed, however, and there is more money coming out of the account than there is going in, your cash flow is negative. Ideally, you want to keep your account in a positive cash flow state.

Types of personal cash flow

  • Incoming: your wage, earnt on the side from hobbies or a second job, money from government benefits, rental income or investment income.
  • Outgoing: money that leaves your account in the form of bills and spending. 

What is a cash flow statement?

A cash flow statement reports the outgoing and incoming cash during a time period. A cash flow statement is useful in determining the current state of your finances (positive or negative) as well as predicting future cash flow.  

How is a cash flow statement useful?

Managing cash flow can help you to make important financial decisions, and help you get more of an understanding of your financial state. When you’re spending more than you earn, that’s negative cash flow. If you’re in this situation, you’ll find yourself having to use lines of credit or building up debt. Learning how to manage your cash flow can keep you from having to resort to this. 

It is also helpful to;

  • sort your spending into categories and learn where you spend the most and where you should cut back
  • work out if a financial decision such as changing careers, or moving homes will work for you
  • set financial goals
  • understand your ability to finance a home or a vehicle
  • learn what ‘disposable income’ you have

Managing cash flow

Managing incoming and outgoing cash flow strategically will help you stay afloat during tough periods. Managing cash flow in a way that keeps a positive account balance means being smart and strategic. Some methods to achieve this include:  

  • Increasing your income via a second job or earning extra money through projects on the side
  • Using the payment term to its fullest. If you have a thirty-day term on a bill, use the whole thirty days to pay that bill.  
  • On the flip side, if your provider offers a discount for paying your bills early, take advantage of this. 
  • Look ahead and save money from each pay packet for upcoming larger yearly expenses such as council rates, yearly car registration or even Christmas expenses. Setting aside smaller amounts each pay helps take away the stress of coming up with large amounts of money in a short timeframe. 
  • Saving money into an offset account from your mortgage which helps reduce your interest charges.

Managing and understanding the concept of cash flow is a very useful strategy for achieving a good financial state. When you can better manage your cash flow you’ll be less stressed about money and more likely to keep on track of your financial goals.

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