Let’s prepare our statement of cashflow

Among all of the financial statements — balance sheet, income statement, and statement of cashflow, introduced in this section — which one do you think is the most important?

Actually. each statement answers a different objective, so to say which one is more important is quite difficult.

But most companies that go bankrupt are companies that have problems with cashflow. That is, it is possible that they might generate profits, but have poor cashflow management — that will lead to bankruptcy as well.

Or if we look at it the other way around, some companies be making a loss, but they can still make a comeback if they have good cashflow management.

That means that the statement of cashflow is vital.

If a statement of cashflow is so important for companies, then what about you? Have you ever prepared this kind of statement? Normally, there are 3 types of cashflow: cashflow from financing activities, cashflow from investing activities, and cashflow from operating activities.

The first part of the statement of cashflow generally looks at cashflow from financing activities, or more simply, cashflow from borrowing or paying back money. If you want financial freedom, this figure should be negative — that is, we should be paying back debt faster than we borrow. And once we pay all our debt back, we should not borrow unless necessary.

People with financial freedom should not have any cashflow here, because they do not need to borrow, and if they do not have to borrow, they also should not have to pay back debts.

For example, let’s say that last month we paid back a loan of 2,000 dollars. Our cashflow from financing activities would be –2,000 dollars, which is a good thing.

The second type of cashflow is cashflow from investing activities, that is, cash spent on or received from sales of investment assets It is also a good sign if this is negative. Deficit cashflow from investment means we are investing that cash. The only thing you need to make sure you do is to invest your money into assets that generate income, not assets that incur expenses.

But if this cashflow is positive, then it might mean that we are selling our assets; and if these are assets that can generate income, then this action would mean that we are cutting down our future passive income.

For example, let’s say we sold 10,000 dollars worth of stock paying dividends last month, without making any further investments in income-generating assets — let’s say we even decide to spend it on a down payment for a brand new car instead; this means our cashflow from investing activities equals 10,000–0 = 10,000 dollars. The number is positive because we sold stock and hence have more cash. This is not good, right? Since we sold assets that generate income, and also plan to buy an asset that does not generate income — this could be bad.

The last form of cashflow is cashflow from work (operating activities). This one is easy; the higher the number, the better. The source of this cashflow is income both active and passive, minus expenses. The higher the cashflow from operating activities, the faster we can pay off our debts (cashflow from financing activities) or invest in assets that generate income (cashflow from investing activities).

For example, say we received 3,000 dollars in salary for our job and 1,000 dollars in rent last month, and had 2,000 dollars in expenses. This means our cashflow from operating activities is positive: 3,000 + 1,000–2,000 = 2,000 dollars. We can invest this money or spend it on paying back our debts.

Have you checked your cashflow today?

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