Cash flow is considered one of the most important financial concepts. Cash flow management allows you to predict the amount of money that will be available to you or your business in the future. It also assists in identifying the amount of money your business requires to cover debts.
Another way of describing cash flow is the term, which is used to describe changes in the amount of money your business has from one point to another.
Some people have a belief that a lot of money issues can be resolved by increasing income. However, this is not necessarily true. In reality, cash flow is as important as incoming money. An increase in income means nothing if you are not aware of how money moves through your company. It is highly essential to have an understanding of this concept to get on top of your finances and find long-term financial success. It does not matter whether you are building a profitable business or managing your finances, cash flow is equally important.
Concept of cash flow
In simple terms, cash flow depicts the way money flows through your economy or the company. It allows tracking how you or your company are using money and the way things are going financially. Cash flow involves two major elements, income, and expenses. It simply means that you have to pay attention to the amount of money coming in and where that money is going out. It is also important to differentiate between positive and negative cash flows.
Positive cash flow occurs when more money is coming in than going out. The goal of any business or your personal goal should be to obtain a positive cash flow. In this case, you will know that you live within your limits and also have some extra money left. If you understand these concepts you can even start your very own cash flow business.
Negative cash flow works oppositely. This is a situation where more money is going out than coming in. If you or your company has negative cash flow for several months you will be left in debt and unable to pay bills.
It is crucially important to get an understanding of where you stand and pay attention to that. As was mentioned before, the goal of the company should be to obtain positive cash flow. It will assist in having extra resources for the development of business. Cash flow management is normally taught at universities and is a quite complicated process.
Timing in cash flow
Timing is an important part of cash flow management. It is all about when you receive the money and when the money goes out. This is considered as important as the amount of money you end up with at the end of the month. To get a better understanding of this, let us take a mortgage example.
Let’s assume that your mortgage is established to be taken out from your account on the 11th of the month. However, you receive your salary on the 1st and 15th of each month. What happens if on the 12th you are unable to pay the full amount and are $100 short? Most probably you are not going to be very happy if your overall month is going to even out when your bank sends back your mortgage payment due to insufficient funds. Furthermore, you might also get exposed to additional fees, meaning that the mortgage company and your bank will both hit you with fines. To summarise the aforesaid, if your income does match with your bills you are running a risk of missing payments on occasion.
It is advised to pay careful attention to the timing. As an option, you can divide your bills according to when you are likely to receive income. In this way, you will split up your expenses and smooth the cash flow. If you can better match your expenses with your income, it will give you a chance to save money on fees for missed payments. Timing is a crucial element, which will allow you to stay on top of the situation when things are not running the way they are supposed to.
Cash flow management
Cash flow management is vital if you want your cash flow to work properly. In simple terms, you need to know how to plan. Check out your obligations and bills. Make sure to consider things like debts, and groceries and determine whether you can budget for these types of expenses. You should not forget about payments that come after long intervals. For instance, you might be making your car insurance payments once in six months. Make sure you save some money to be ready for these expenses and it does not blow your cash flow.
The same works for taxes. It is advised to set a certain amount of money each month meant to make estimated payments. As a result, when your quarterly taxes are due, you will just pay them. Cash flow management is a good way of maintaining your financial success in the long run.
Backup plan for your cash flow
You can still experience a situation where you feel the pinch even if you plan ahead and mainly encounter positive cash flow. Thus, it might be a great idea to have a backup plan to smooth your cash flow. The first recommendation would be to have a line of credit that would be connected to your checking account. In this way, money is automatically transferred to your checking account. You will pay interest only on the amount if your carry balance. Although, if you pay off that amount straight away you do not have to worry about interest.
Another backup plan could be having a savings account as a way to hold your emergency funds. By doing so, you will be able to quickly transfer the money into your checking account when needed. You can also make use of credit cards as a way to finance your expenses. By making use of this option you will pay off the cards each month so you will not need to worry about interest. Apart from that, there will be no need to worry about making payments until the money is in the bank. However, it should be also said that you need to be careful and spend the money, which is within your budget.
Automatization of your cash flow
This process simply means that your bills will be paid even if you are not in town or do not have access to the Internet. Automatization might be a good move. However, you need to be careful about this option as it might bring some problems to your cash flow. For instance, if you need to make a payment but the money is not there you run a risk of incurring additional fees quickly. If you attempt to automate the process you need to make sure that your cash flow is set up so you do not increase the likelihood of having problems in the long run.
Once you start handling your cash flow you will be able to start making better decisions with your money. You will be also more likely to experience long-term financial success.
