What is Cash Flow?
Cash flow is the total amount of money being transferred into and out of a household. It refers explicitly to liquidity. The main thing to keep in mind, though, is that cash flow is not the same as income. As businessman and personal finance author Robert Kiyosaki says, “Making more money will not solve your problems if cash flow management is your problem.” Cash flow factors in payments made to creditors and household obligations, how quickly you’re being paid for your products or services, and any other forms of money flowing into or out of your household. If you’re bringing in money erratically, paying your bills late, or not managing savings, you may have cash flow management problems.
How to Determine Cash Flow Health
Determining effective cash-flow management requires focusing on each of these elements:
- Income Sources: What resources you have for producing income.
- Expenses & Debts: What you owe or have paid to others.
- Surpluses: When you’re making more than your spend on expenses or debts.
- Deficits: When you’re spending or owe more than what you make.
You’ll then need to evaluate how each of these elements are impacting each other and establish a break even point where there isn’t a Surplus or a Deficit.
How to Determine Your Break Even Point
To determine your break even point, you can evaluate your fixed costs, which are costs that don’t fluctuate. These include household needs like your mortgage or rent, utility bills, and installment loan payments. You then look at the averages of your variable costs like food, clothing, and car expenses. Next, consider your savings goals like 401(k), IRA, or 529 Plan contributions. Lastly, you look at your discretionary expenses like Netflix and monthly subscription services. This will tell you how much you need to bring in to meet all of those obligations at each level: Fixed Needs, Variable Needs, Savings, and Discretionary. It’s important to know what’s in each category, so you know where to cut to balance out to your monthly/regular income.
Top Tips For Managing Cash Flow
Maintain separate accounts for business and personal
This is a common mistake among start-ups and small solo businesses because a lot of the funding is coming from personal bank accounts. Setting up and maintaining separate accounts allows you to monitor your cash flow more effectively without having to deduct your groceries from the equation every time or remember to add back the office rent you paid with a personal check.
Collect and deposit revenue ASAP
For your business invoices, instead of using language on that include due dates like “due in 30 days,” change the language to “due upon receipt.” This encourages your customers/clients to make payment in a timelier manner. You’ll be surprised by how much that small change can affect your bottom line. Accept electronic payments if it would help speed things along. Consider the fee an offset for timely payment but try to minimize it as much as possible. Maybe only offer it for a limited period of time, after which payment has to be made by cash or check.For your personal paychecks, set up direct deposit, if possible. More and more employers offer it by default these days. If it’s not available, make sure your bank has mobile deposit available. You can deposit your check from the car as soon as you get off.
Extend bills as long as possible
Work with your creditors to get the best possible deal on interest rates. Figure out exactly how late you can pay without incurring late fees, and this will keep more cash in your hands as long as possible.
Maintain some cash reserves
Shortfalls will happen, even more so with irregular income, and it’s best to be prepared for those situations. Planning ahead when you’re managing cash flow by having reserves to last you for a three-to-six month time period will be extremely helpful in the long run.
Establish a system to manage cash flow
Whether this is a spreadsheet or something like Quicken or MoneySpire to manage cash flow, establishing a system to analyze and keep track of cash flow is essential for a healthy business. General cash flow projections allow you to make informed decisions about the future.
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