Businesses fail because owners don’t fully understand cash flow. The same is true for your household’s personal financial statement. What is cash flow? How does it apply to you? How can you improve your cash flow?
These are the three questions that are about to be answered for you.
What is Cash Flow?
Simply stated, cash flow is the difference between cash coming in and cash going out. You always want cash coming in to be more than cash going out, by as much as possible.
Cash coming in is from wages, interest, sales (online and offline), rental income, Social Security (if you’re 62 or older), etc.
Cash going out is from all of the bills you pay, the expenses you have, the money you pay for entertainment, and any other money you pay someone for a product or service.
Calculating cash flow is sometimes tricky. Bills are due in different sequels: weekly, monthly quarterly, or annually. If you understand how your cash flows, you’ll know how to improve your cash flow.
Create a snapshop of your Cash Flow
Before you can improve your cash flow, you must first see it. There are many online tools to create a cash flow snapshop, but the easiest way is to create a spreadsheet. If you have Excel, you have the perfect tool. If not, download the free software from OpenOffice.
- First, put each month across the top of the spreadsheet with an annual total.
- Second, enter all your revenue and corresponding expense descriptions in the left-hand column.
- Third, enter your cash received and cash paid by month, for each description. Sub-total the cash received and cash paid by month.
- Finally, subtract the total cash received from the total cash paid.
Now you have your complete cash flow snapshop right in front of you. Here’s how it will look.
If you know how to use Excel or OpenOffice, you can set up the spreadsheet to automatically calculate the totals. If the bottom number is positive, you have good cash flow. If negative, you have a bad cash flow.
Now that you have a snapshop of your cash flow, you can identify problems that may exist, solve them, and have a much better cash flow. This is what I’m going to show you next.
7 Ideas to Improve your Cash Flow
- Study your results. See if there are months where more cash is going out than coming in. This happens when large bills are due. Try to balance these high-expense months over the entire year if you can do this. Common causes are: holidays, property tax payments, homeowners and car insurance, annual income tax payments, and finally, vacations.
- Build a special reserve fund. If you know there are months with higher expenses, budget how much extra cash you’ll need. Set it aside in a savings account, designated as your special reserve fund, during positive cash months.
- Cut back on monthly payments. See what monthly expenses you have. 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 to review your insurance coverage?
- Shop for savings on your current expenses. Some of your larger bills should make you want to shop around for better rates. This is especially true with homeowners and car insurance, cable service, and cell phone plans.
- Don’t confuse a large savings account with cash flow. Your savings is an accumulation of positive cash flow over several months. A high savings balance can cause you to ignore months when more cash is going out than coming in. Don’t fall into this trap.
- Threat yourself as one of your creditors. Add a “paid to yourself” in your spreadsheet under cash paid. Be faithful in paying this bill each month, as you are in paying your other bills. This will encourage a positive cash flow each month and help you build that special reserve fund.
- Put your credit cards on ice. I mean this literally. Place all of your credit cards in a plastic container, fill it with water and keep it in the freezer. Then, when you make a purchase, pay with cash. This will save you hundreds, and maybe thousands of dollars each year in interest. If you follow the other 6 ideas, you’ll have the cash to make these purchases.