When it comes to finance of any kind, a term you must be familiar with is “Cash Flow”.
So, what is Cash Flow?
According to Wikipedia, cash flow is:
the movement of cash into or out of a business, or project, or financial product. It is usually measured during a specified, finite period of time.
Simply put, cash flow is the difference between what comes in, and what goes out. Ask any business owner. Even if a business is profitable, has great sales and a great product, if cash flow is ignored, that business isn’t long for this world.
For example, Let’s say I run the Wonderful Widget company. I make the best widgets in the world. I also have the greatest sales team selling my widgets. We just had a huge sales push and received a record number of orders for my widgets, but making widgets costs money. I have to:
- pay my employees
- buy the materials to make the widgets
- pay for my widget wharehouse, and my widget making machines
- I have packaging and distribution expenses
- As well as a host of other expenses associated with making my wonderful widgets
Now, I went out and sold all those wonderful widgets, but it may take up to 90 days for that money to roll in. If I don’t have some cash on hand to pay all my expenses, I’m finished before I ever get started.
Even though my business is doing great, if I don’t pay attention to my cash flow I’m in big trouble.
It is the same for personal finance as well. We need to pay close attention to the difference between what we spend and what we earn.Cash flow can be Positive: we have more money coming in than going out…GOOD. Or, it can be Negative: more going out than coming in….BAD
Cash flow is dependent on time also. If I measure my cash flow for just this month, I may be negative, because the car broke down, the dog swallowed the baby’s toy, or college tuition is due. But, if I stretch my analysis out over say 12 months, after all my income comes in and all my expenses go out, I might be positive.
If you constantly have more going out then coming in, then you’ve got a real problem on your hands. Remember positive cash flow = GOOD, Negative cash flow = BAD. No entity, business or person, can last long in a negative cash flow situation.
What are some ways to increase cash flow?
Simple, spend less, make more. Ok, not very helpful, but that is the concept. To increase cash flow, whether monthly, quarterly, or annually expenses must be reduced and/or income must be increased.
For most of us reducing expenses is easier than increasing income, but there are always ways to do both. In my next article, I will be going in depth about ways to increase cash flow, by both cutting expenses and increasing income. If you have any unique ways to increase cash flow, please share them with us by leaving a comment.
Borrowing
Lastly, if cash flow becomes a problem, and you can’t cut expenses or increase income, there is only one solution left…Borrowing.
Borrowing money can be a way to temporaily solve a cash flow problem. As one who hates debt of anykind, I also hate this solution, but realistically in order to keep food on the table and a roof over your head, borrowing is sometimes a fact of life.
Borrowed money can come from many sources.
- You can borrow from yourself by tapping into savings
- Take a loan from your retirement account
- Borrow from friends or relatives
- Borrow from the equity in your home
- Borrow from Credit cards
As you can see, none of these options is really all that appealling. In fact the later two are pretty much responsible for our economic situation right now.
It goes like this:
Families get into trouble, meaning they have a cash flow problem, so they borrow money from their homes or the credit cards, and the cash flow problem doesn’t get fixed. Instead the situation gets worse and they have a pile of debt to boot.
Borrowing money to fix a cash flow problem is never a good solution, and should always be a last resort.
The best offense is a good defense. Keep your debt low, if not zero, watch your expenses and spending, and save.
Remember, you must keep an eye on cash flow. It’s the life blood of your personal finances. Without it, your financial heart will stop beating.