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Preparing a Cash Flow Statement – Textbook Personal Finance

This post is part of the textbook personal finance series which covers basic personal finance skills by going through an actual textbook, chapter-by-chapter. Check out the intro post for more information.

While creating a personal balance sheet is the best way to find out your net worth, your net worth doesn’t necessarily reflect your everyday life. If all your money is tied up in your house, then getting your hands on it may be difficult if you’re out of work, etc.

A cash flow statement is like the records sheet (or the spending side) of a budget. It is a summary of cash receipts & payments over a given period. Your weekly cashflow may be tighter than your monthly cashflow or your annual cashflow, especially if you have a seasonal or teacher’s income.

Creating a cash flow statement is similar to preparing for a budget. The focus can be similar—to figure out what spending you can cut, to figure out how much flexibility you have to work with. Or you may just create a cash flow statement in order get a look at your last month or quarter and make sure you’re spending less than you earn.

Cash flow statements can substitute for budgets as long as your outflows are smaller than your inflows (otherwise, you’ve got a problem). If you’re already budgeting, then your end-of-the-month results are already your cash flow statement. Move to Princess Lolly and have a good weekend!

Step 1. Record Income and Inflows

For most people, the primary source of income is from a job. And for most, this is a predictable income since it’s based on the same salary for the same number of hours/workweek. Be sure to put down your disposable, take-home income, not your salary.

For freelancers and others who income comes mostly/partly from unreliable sources, this is a much more important number and making cashflow sheets is a great way to track your progress—by putting your earnings up against your outflows. Primary sources of income may also be retirement savings or Social Security.

Other numbers to consider are commissions, interest, dividends, alimony, and child support. If you’re living on savings after having lost a job, or while in school, then put down the amount you plan to spend each month.

Step 2. Record Cash Outflows

The best way to track cash outflows is to sit down with an entire month of receipts or, if you use your debit/credit card for everything, a month’s statement. The only benefit of receipts is to a) jog your memory about the specifics of your spending and b) remind you of cash transactions.

There are two kinds of cash outflows, fixed and non-fixed. A fixed outflow is the same every month. Our rent and cable bills are fixed. When we had a car payment, that was fixed. Some variable expenses are nearly fixed. Our water bill hovers around the same $5 range every month, so we budget just a little extra and stick it in the fixed expenses.

Most expenses are variable. Your gas costs for the month may depend on whether you were snowed in for a week or were working at a different site or decided to visit your family who live a few hours away. Don’t leave anything out—this is a picture of how your cash actually flowed this/last month/quarter/year, not how it looks on average.

Step 3. Calculate Net

Add up inflows and outflows. Subtract outflows from inflows. This is your cash surplus (if positive) or deficit (if negative). If you’re happy with the number, you can just stop here. Or, proceed to step 4 and start planning your next move.

Step 4. Plan for Surplus or Defecit

Surplus is good. There’s nothing wrong with letting it just sit in your account and add up. But you may want to move it to a savings account so it earns interest, apply it to any debt, or use it for other financial goals like funding a Roth IRA.

If you have a deficit, it’s time to work on a financial plan for either earning more or spending less. Cash flow statements are a great start when creating a budget. Without addressing problems and creating a spending plan that keeps you within your income, it only gets worse.

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Using Your Tools to Achieve Financial Goals – Textbook Personal Finance
March 5, 2010 at 5:01 am

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WellHeeledBlog February 21, 2010 at 1:37 am

One of the interesting things I learned in accounting is that even if a company has income, it can still go bankrupt if it doesn’t have enough cash to cover its interest obligations. Cash is definitely king. I think a similar issue exists for freelancers – I’m doing some freelance work and my invoices don’t get paid out until 30-60 days after the work is submitted. So technically I’ve earned income for that month, but I don’t actually get the cash until weeks later.

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