Cash Flow Analysis
No business can operate successfully without using a cash flow analysis, but most people forget that their own personal solvency might also benefit from the use of a solid cash flow analysis and research.
Quite simply, cash flow analysis is a record of your cash flow, both in and out. For many, the recording of personal expenses can be a huge boon to becoming financially responsible and ultimately, solvent. Basically, it works like this: You write down everything you spend. This is your cash flow. You can also record what comes in, but that is a detail you will save for your personal budget. People who are trying to get control of their finances often begin with a cash flow analysis. Then they develop a budget.
You can not successfully develop a budget until you know where your cash is going. Until you understand where you are spending your money, you cannot figure out how to budget funds in specific categories. What is interesting about a cash flow analysis is this: Often you are shocked and surprised at where you are spending your money. Because so many of us use debit and credit cards almost exclusively, we often do not really know how much money we are spending on things. If you keep a cash flow analysis, you will have a better feel for where your money is going.
How you set up your cash flow analysis is up to you, but many people just record their purchases in a small notebook or in their daily planner. Here is the trick, though: You must record every single penny you spend. You should remember to record the big things, like when you fill your car with gas and the celebratory dinner you have on a Friday night, but also the small things like a Starbucks latte or a candy bar out of the machine need to be recorded as well.
Perhaps the crucial unspoken aspect of the cash flow analysis, then, is the element of being honest. Being honest with yourself about the money you do spend is critical to your personal financial solvency. Having a record of where you spend your money is critical as you begin the process of setting up a budget. If you know where you spend your money, you can easily budget for the various categories. For example, you might find that you spend $20 each month on coffee at Starbucks. If this is an expense you can afford and you have no trouble continuing, then you simply will budget $20 for Starbucks.
If you never write down where you spend your money and you simply make guesses, you might assume that you spend $50 at Starbucks each month, or only $10. You will only know if you record that expense for a period of time. To that end, it is important to know that you will not need to always record where you spend your money. Once you have done this for a month or two, and you get a good feel for where your money is generally spent, you can stop recording your every purchase and begin using that information to help you develop a personal budget.
To successfully enact this plan, here are some tips:
- If you are married, make sure both you and your spouse participate in the spending record.
- Record everything, even if you think it is not necessary - the road tolls, the parking meter expense, the candy bar from the vending machine.
- Do not forget to record your expenses when you go shopping, for example for shoes or clothes. This will help you figure out how much cash is going out each month for these items.
- When you go to the grocery store, and you record the expense, be sure to record expenses in different categories (for example, $30 of the $65 was groceries, $20 was personal care item and $15 you took in cash).
- Set up reasonable categories for you to place your expenses into. You can just record the expenses and later, put the various expenses into the correct categories, but make sure you have the right categories for your specific spending patterns.
- If you are trying to get out of debt, or to reduce your overall use of credit cards, be sure to record any expenses you make that you charge to your credit card, even though those do not qualify per se. Make a note that the expense was via credit card, but record it, so when you stop using your credit cards, you will know that you have accounted for all your monthly expenses in your budget.
Once you feel comfortable with your cash record, you might want to step it up a bit and make it a true cash flow analysis by setting a budget and taking into account all your various expenses each month. Once your cash flow analysis is complete you will have taken the first important step in getting your finances under control.