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Oct 26

Understanding What Cash Flow Is All About

Why It is Important

Knowing what cash flow is and why is it important to understand how it affects a given budget is something that can get confusing. Specifically, when there are periods of unabated spending. When a business unit or an individual begins to create a budget, one of the first things scrutinized is where the money is coming from and secondly how and where their money is spent. Knowing the inflow of cash and the outflow of cash are what makes up the road map, as it were, for seeing the big picture of the financial health of a given situation.

Some may equate spending, cash outflow, to an automobile moving forward at a certain speed, thus accelerating in a direction that can deplete the financial resources faster than expected. Therefore, using this same analogy, if the driver of the vehicle was to apply steady pressure to the brakes of the automobile the velocity of cash outflow would slow to an acceptable level. Not a bad way to look at things, and we all are aware of need to have a visual representation of our financial resources including how and why these resources diminish over time.

Controlling Cash Flow is all about Setting Goals

No one in their right mind ever wants to run low on money or get behind on bills. In the same instance, we all enjoy spending money on things we want. There is nothing wrong with controlled indulgence. The important factor is however, knowing when we can purchase that new set of dishes or take on a new car payment while not over extending or going outside of our budgets. This is where setting financial goals become paramount in creating a lifestyle we can enjoy. In the realm of business, it is all about the ‘bottom line’ or ‘profit.’ Businesses that spend more than they make will never show a positive cash flow. This means that there should be a balance between the profits and expenditures a business has.

More to the point a positive cash flow is where there is a higher amount of cash coming into the company than leaving the business through spending on its liabilities. This same principle is applicable to a family or even an individual. This is a point of view not everybody understands. When we are young we get a job and we enjoy spending our hard earned money for fun and frolic, as we get older we begin to understand the latitude and the importance of setting financial goals, which result in lower spending and higher savings for critical investments, such as a retirement fund.

This is a goal, as is, wanting to buy that first house or condominium, or our first car or motorcycle. Although the latter two items aren’t really financial goals per say they are reasons to set a budget and create a plan for controlled spending or using the analogy from earlier, driving a car using steady braking to slow down when it is necessary for our safety. Things like this begin to take precedence when a family is involved. A goal may be to send your child or children to college. At the same time, life continues and there are times when spending can get out of hand. Specifically, when we allow credit to enter and get involved in the financial scheme of our life.

Most Things Considered

Credit is not a bad thing, however, it can get out of control if used and applied in a less than prudent manner. When we are setting financial goals, knowing the amount of credit available is just as important as knowing the full extent of the resources and expenditures that make up our financial landscape. The reason is because is can be part of both the inflow of cash and the outflow of cash at the same time.

Although, credit is not a constant input, it represents available funds for spending over and above what actually enters the financial picture through profit or earnings, whichever the case may be.

That stipulated awareness on the danger of overusing credit is apparent. This is when having a keen eye for observing the nature and frequency of cash outflow is important to knowing when to apply the brakes, so to speak. Controlling the input of money for an individual is the easy part in most cases, for simplicity, we can put it this way, a person gets a job, this creates the inflow, the out flow begins with paying for a home, apartment, or condominium, a car or truck, food, clothes, utilities and furnishings for comfort. Credit enters the picture when the earnings reach a state that entice and enhancement.

Where it gets out of hand is when a person adopts the attitude that extra money is gained through this credit, which can speed up the amount of cash outflow. The best way to curtail this situation is to re-evaluate how money is being spent and to decide how the spending fits into the financial goals, or if it fits at all. It all boils down to managing our money wisely and prudently to facilitate getting what we want without going broke and meeting our goals at the same time. I connection with the analogy used earlier, set a speed limit for yourself and make sure to treat spending opportunities as stop signs so you can take the time to evaluate whether or not to move forward or to turn away.

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