Cash Flow Management 101

Are you ready to get your finances organized the smart way?

Following our article last week, where we have discussed why budgeting does not work, we would like to show you a better way. Let Fairlo introduce you to cash flow management, a simple and efficient framework to manage your finances.

What is cash flow management?

Cash flow refers to the amount of money coming in and out of your pocket over a period of time. While it is most used in a business environment, it can be easily adapted to your personal finances. It helps to compare how much you have earned versus how much you have spent in a defined period of time.

Cash flow defines your long term financial success — if you regularly spend more than you earn you are likely to accumulate debt. While earning more than spending leads to savings and financial stability.

Cash flow management refers to the process of monitoring and understanding your financial movements, which can help you optimize your earning and spending patterns.

What can cash flow help you with?

There are 4 key benefits of cash flow management:

1. Clear overview of where your income is going
   Whether you earn a steady paycheck, work as a contractor, make hundreds or millions- you need to know how much is your revenue and where it is leaving. Managing your cash flow introduces structure, clarity and overview to your finances.
2. Ability to assess your financial status
   Like it or not- your financial status defines many things in life. It will certainly define your credit score, ability to get a good mortgage for your dream house or apply for a loan. Cash flow management can help to improve your financial status and set you up for success.
3. Discover ideas where you can improve your money management
   Once you have cleared up your financial reality, and understand the flow of expenses it will give you an idea where you can adjust. Maybe you can decrease your utility plan, restructure your mortgage or look for another source of income. These opportunities to improve will pop in front of your eyes through a structured cash flow statement.
4. Set and follow financial goals
   As the famous saying goes, a plan without a goal is just a wish. If you plan to buy a house, go on your dream vacation, plant 1000 trees in the Amazon forest- define how much money you need to make these a reality. Then use cash flow management to work towards these goals on a steady basis.

Cash Flow Management

The key component of cash flow management in the cash flow statement- a handy summary of finance movements. This is usually in the form of an Excel Sheet, or within a financial software. The cash flow statement is for a fixed period of time, usually one month, but can be assessed also quarterly or yearly. We recommend using a monthly structure for cash flow management- but you can adjust to your exact situation.

Key elements of a cash flow statement:

Incomes

The first section in your cash flow statement is about your revenues. You can collect here all the earnings from a certain month. These could be from your salary, interest, dividends, any social security benefits or scholarships.

Expenses

From the matcha latte to mortgage- create an overview of all the things you spend on in a month. Instead of listing each purchase by item, we recommend using categories as insurance, mortgage, utilities, groceries, shopping, travel or entertainment. You can make as many or few as you like- the goal is for you to understand where you spend your money.

Savings

If your cash flow balance is positive, meaning you have more income than expenses, you will have space to create some savings! Add how much you save and where, for example in an emergency, retirement or investment fund.

Balance

The smartest parts of your cash flow statement are your 3 balances. The first is a starting balance- the amount of money left over from last month, or debt to settle. The second balance is used to compare income vs. expenses before savings. It gives you an overview of how much of your income you can use beyond the current month. The last balance is combining your income minus expenses and savings. This amount is the additional bonus which you gain after completing your savings goal, and spend freely.

Thank you for joining us on the cash flow journey, and we hope you have found this article useful. Next week we are going to dive into the practicalities and show you how to create and fill your own cash flow statement. Stay tuned!