Part 1: Effective Cash flow Management
Achieving financial success and building wealth – isn’t that the dream we all live for? We all have a deep desire to be financially secure. But what does that mean? Depending on who you ask, that could look very different for everyone. For a mother, that can look like making sure she has enough to cover education for her kids and buy a house. For a business owner, that can look like being able to run a successful business while sipping mojitos on an exotic beach.
But no matter what the dream, money is money, and some of the steps taken to achieve financial security may be the same. In this mini-series, “Achieving financial success and building wealth,” I will share 4 tips that you can use to help you on your financial journey.
In the first area, we take a look at a core element of finance – cash.
Cash flow management is the process of managing your cash. Whether it is for a business or personal, the effectiveness of cash management rests with your ability to generate cash and utilise it well to meet your obligations or even build more cash.
Effective cash flow management needs an understanding of 3 main areas:
● Sources of cash
● Uses of cash
● Timing of cash
When combined and executed correctly, these areas help you achieve healthy and sustainable cash flow over time.
Sources of Cash
Where do you get your cash? If you are employed, it will be from your salary. If you are running a business it will be from the sales of the products or services. These will be your inflows of cash. It’s important to have a firm understanding of your source and its characteristics.
Employment income tends to be fixed. So this brings a level of stability to your inflow. You know exactly how much will be coming in. This makes it easy to plan because there is a level of certainty.
Business income is anything but fixed, thus making it hard to plan. Some months will be better than others. This means that your management of cash requires a keen understanding of the highs and lows of the business in order to predict what might happen.
Uses of Cash
What do you use the cash for? These will be your outflows. Outflows come from personal expenses and business expenses. You need to have a keen grasp on the outflows in order to manage them. Just like the sources of cash, you should understand its characteristics as well. Are your outflows fixed or are there fluctuations?
Which areas of your life or business are using up your cash? Having a clear idea of where the cash is going can help you make decisions about the spending itself. You may have unnecessary expenses, contributing to wasteful spending.
Timing of Cash
When are the cash flows happening? The timing element brings both the inflows and outflows together. The inflows fund the outflows. The cash flows need to be matched up so that the outflows happen in timing with the inflows, thereby ensuring that cash is available to meet the outflows.
Timing is critical because, without it, you can end up in a situation where you are unable to meet your obligations.
Each one of the areas cannot exist alone, though. They all work together for success. It won’t be enough to know what your inflow is if you don’t know your outflow, and it won’t be enough to know the timing if you don’t know how much is coming in.
Calculating the Cash flow
So what do you do when you know the sources, uses, and timing of your cash? You calculate your cash flow to understand what your position is.
Inflows – Outflows = surplus or deficit
Surplus indicates more inflows than outflows, and deficit indicates more outflows than inflows. So ideally you always want to be on the side of surplus. But as always the ideal situation never happens, so a more manageable situation is that over time you should have more surpluses than deficits. So when the deficits do happen, you will have previous surpluses to support them.
Managing your cash flow is key to a healthy financial future. Ensuring you have enough cash on hand to cover your expenses and taking advantage of opportunities as they arise are both important aspects of effective cash management.
Stay tuned for the next part of the series for more guidance on achieving your financial goals.