
Is Cash Flow Management Important To Us?
Cash management is important in order to have full control over your finances. Cash is a form of exchange used to buy and sell goods and services. Therefore, you need to understand your spending habits before you start to spend the money.
Do you frequently drain your money before the month is over? Or perhaps you have the extra money in your account? Regardless of the response, this first stage is a realistic evaluation that will aid in your analysis of the ratio of revenue and expenses. This concept is called cash flow management.
A cash flow analysis can help you determine your income level, spending patterns, and lifestyle requirements. We must gain a basic understanding of cash flow management in order to comprehend the meaning of cash flow thoroughly.
What Is Cash Flow Management?
Cash flow management is the process of monitoring, analyzing and coordinating your personal cash flow. Cash flow contains two main components; income (inflow) and expenses (outflow).
Your income or cash inflow includes active income and passive income.
Active Income | Is the outcome of your career or company venture. Once you stop working or selling, your active income will also cease.An example of active income is a salary and business profit. |
Passive Income | Earned from savings or investments. Your employment status is unconsidered while calculating passive income. Rent, dividends, interest or profit, and even royalties are examples of passive income. |
On the other side, cash outflows are made up of fixed expenses, variable expenses, and
discretionary expenses.
Fixed Expenses | Is a constant expense. This expense is typically a recurring monthly payment for basic necessities with a fixed amount. Examples of fixed expenses include the monthly installment payment of housing loan and hire purchase, rent of a house, insurance premiums and wages of your child’s nanny’s fees |
Variable Expenses | is a non-fixed expense. Variable expenses are frequently used to meet life’s expenses, just like fixed expenses. Example of this expense are food, clothing, utilities bill and household needs. |
Discretionary Expenses | Is an expense to your desires. The majority of your discretionary spending goes toward items that can make you happy rather than necessities. Dining out, designer or pricy clothing, air conditioning, satellite TV subscriptions, entertainment, and luxurious household products are a few examples of discretionary expenses. |
Let us just move on to learning how to utilize the cash flow statement by comprehending cash inflows and outflows.
What Is The Cash Flow Statement?
The cash flow statement shows all income (cash inflows) and expenses (cash outflows) in a certain period. The cash flow statement is a fundamental tool for analyzing your financial situation. Having effective cash flow management will ensure you to consistently earn enough money to cover all of your expenses. Additionally, it will put you in a good financial position.
What Is Your Cash Position?
If your income exceeds your costs, you have a surplus in your cash (positive). However, if your spending exceeds your income, this is known as a deficit (negative).
Total income > Total amount spent = EXCESS CASH
WELL DONE! CONTINUE YOUR EFFORTS
Total amount spent > Total income = DEFICIT CASH
REVIEW YOUR SPENDING PATTERNS
It is highly possible that you will need to borrow money to pay for your upcoming expenses when the cash situation is negative.
If you have spent all your income, this does not mean that your cash position is good. When you spend all your income, you do not actually have any savings for emergency purposes. Imagine what would happen to your financial situation if you were fired or rendered unable to work again.
You must always have extra cash on hand if you want to be in a comfortable cash position. This excess cash not only allows you to save for unforeseen expenses but also can be used for investment purposes. In this way, you will achieve financial goals faster.
So how do you manage the cash flow so that your cash position is at the surplus level? Making a budget is one of the most successful strategies.