Cash Flow Management – Part One

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Managing your cash is important to ensure that you have complete control over your finances. Since cash is an exchange tool that allows you to buy goods and services, it is important for you to first understand your money managing habits.

Do you normally run out of cash before your next pay cheque arrives? Or are you the type who has more than enough balance in your bank account? Regardless of your answer, this first step of a realistic assessment will help you analyse how much cash you earn against what you spend. This simple concept is called cash flow management.

Analysing your cash flow can tell you a lot about the nature of your income, spending habits and lifestyle requirements. Let us get started by learning about cash flow management.

What is cash flow management?

Cash flow management is the process of monitoring, analysing and adjusting your personal cash flow. Your personal cash flow is made up of two main components; your income (inflows) and your expenses (outflows).
Your income or cash inflows may consist of active income and passive income.

Active income

It’s derived from your employment or business ventures. The moment you stop working or doing business, your active income also stops. Examples of active incomes are salaries from employment and profits from businesses.
Passive income

It’s derived from your savings or investments. Passive income is received regardless of your employment status. Examples of passive incomes are income from interest or profit, rentals, dividends and royalties.
Cash outflows, on the other hand, include fixed expenses, variable expenses and discretionary expenses.
Fixed expenses

It’s fixed in nature. These expenses are generally necessities and the amounts incurred are normally the same every month. Examples are housing loan and hire purchase instalments, rental payments, insurance premiums and childcare expenses.
Variable expenses

Vary from month to month. Like fixed expenses, most variable expenses would also be considered necessities. Examples are food, clothing, utilities, mobile phone bills and essential household items.
Discretionary expenses

Vary from month to month. Like fixed expenses, most variable expenses would also be considered necessities. Examples are food, clothing, utilities, mobile phone bills and essential household items.
Discretionary expenses

These are optional expenses. Most discretionary expenses are items which are considered non-necessities or nice-to-have. Examples are dining out, branded clothing, air-conditioning, cable TV, entertainment and non-essential household items.

Now that you have an understanding of cash inflows and outflows, let us study its application through a cash flow statement.
What is a cash flow statement?

A cash flow statement shows all your income (cash inflows) and expenses (cash outflows) for a given period of time. It is a basic tool to check your financial health and assess your financial position.
Proper management of your cash flow ensures that you always have sufficient income to pay for all your expenses and puts you in a good cash position.

What is your cash position?
If you receive more than what you have spent after deducting your expenses, you have a surplus (positive) cash position. However, if you spend more than what you get, then you are said to be in a deficit (negative) cash position.

When your cash position is in a deficit, you will most likely use borrowed money to subsidise the cash shortage you are experiencing.
Spending exactly what you earn does not count as a good cash position either. When you spend exactly what you have, it means that you do not have any savings in case of emergencies. Imagine, what would happen to your cash position if you lose your job or earning capability?
To be in a good financial position, it is advisable to have cash surplus at all times. A cash surplus not only allows you to keep money aside for unexpected expenses but also gives you an opportunity to build your investment. This will bring you closer towards achieving your financial goals.
So, how can you manage cash flow to achieve cash surplus? One of the most effective ways is through the use of a budget.