How Does Your Cash Flow?
You likely associate this term with businesses. A Cash Flow Statement tracks the movement of money through the business over a period of time. You might be thinking “but I don’t own a business.” Well, yes – you do. You are “in business” to fund the needs and wants that you and your family have now and will have in the future. Now that you know you are in business you will want to take a purposeful approach to managing your money. As we discuss cash flow statements you will see that a spending plan or budget is a preferred financial planning tool for individuals and families.
Let’s set the Cash Flow Statement period to be a month. In this case, a Cash Flow Statement will show how much cash is on hand on the first of the month; this can be either the remaining cash carried forward from the previous month or some type of income that was received on the first of the month. Then over the next 30 days any cash received during the month will be added to the beginning balance. Now you have beginning balance plus cash received. But you will also spend money during the month and all money spent during the month must be shown as a subtraction on the Cash Flow Statement. This is similar to the method to maintain a transaction record for a checking or debit account. When the end of the month arrives you determine how much cash remains by using this formula:
Beginning balance (cash on hand on the first of the month)
+ cash receipts
= cash on hand at the end of the month
So, you might be thinking that this sounds a little like a budget or spending plan. Well, yes and no. The Cash Flow Statement and the Spending Plan both show the flow of money coming in and money going out. But there is a big difference between these two documents. Can you guess what it is?
The Cash Flow Statement is an objective record of the flow of cash into and out of an entity. The entity could be your business or your family’s bank account. The Cash Flow Statement is a historical record and not a forward planning tool. It reports what actually happened. And that is great, but a Cash Flow Statement will not help a business or family plan where to spend their money or how to spend their money in ways that support meeting goals.
Businesses use a business plan to map out how to meet their goals. For families, a spending plan (or budget) is a key document that assists in staying on track to accomplish goals. And, your spending plan can be developed for whatever period makes sense for how you receive income and pay bills whether it is every two-weeks or once a month. Schedule some time to explore setting up a spending plan. A spending plan can be a great asset in keeping your “family business” on track to meet its goals.
Need some suggestions to get you started?
- You will find information on saving money here.
- Saving for retirement? Check out these tools to sharpen your focus.
- Buying a car? Before car shopping, check out the “Get A Deal on Your Wheels” Fact Sheet.
- Need to cut your spending? Look for suggestions here, to get you started.
— Written by Dr. Carolyn Bird, AFC