The words cash flow statement don’t exactly perk one up do they? No one wants to watch a movie called, Me ‘N my Cash Flow Statement. Hang in there. If you’ve had it with wondering where your money goes every month this might interest you. A cash flow statement tells you where the money is flowing in from and out to.
IT GOES OUT
Cash on a cash flow statement is money that’s in motion. It’s either on it’s way in or on it’s way out. When you spend that money you record where it went to. Regardless of where the money went, it went. That’s a cash outflow. When you receive money you record where the money came from regardless of where it came from. That’s a cash inflow.
When you spend dollars on something you get a receipt or a statement for, that’s a cash outflow. Now hold on tight because this next statement can seem a little weird. When you put cash in savings or invest it that’s a cash outflow too.
Now hold on Jack! How can investing cash in something of real value be a cash outflow.? I retained the value of that money! If you invest cash in a gold bar you spend cash on the gold bar. Yes, you spent cash to purchase the gold bar which is an asset and you own that asset. Whether or not you spent money on a truckload of pistachios or a gold bar the money is spent. It’s a cash outflow.
IT COMES IN
When you sell the gold bar that’s a cash inflow. TA-DA! The principles used to describe the purchase of an asset apply but in reverse. Let’s suppose you sell the gold bar for exactly what it cost. That’s a cash inflow. It doesn’t make any difference that the cash comes from the sale of the gold bar you owned, the cash is flowing in. That’s money in motion.
Other Cash inflows are money that comes in from paychecks, interest income, rental income,and maybe dividend income from investments. It’s cash coming in. If it’s dollars or can be made into dollars you can spend, it’s a cash inflow.
YOUR BEST WILL DO
What makes a cash flow statement work is recording and categorizing all the transactions. This includes both the transactions for money coming in and money going out. If you don’t record and categorize the transactions it doesn’t work. Each transaction has to have a category for what the money was spent on or where the money came from. You total up the transactions in each category. Then you know how much you’re spending on each type of thing like; groceries, eating out, beer, home maintenance and vehicle repair.
When the outflow and inflow transactions are recorded and categorized, total each category. Add up your expense categories and that should equal the total of all of your income categories for the same period.
Even if the numbers aren’t perfect you’ll know where your money is coming from and where it’s going. Perfection isn’t the real goal here. Knowing where your money is going is what it’s about. HOWEVER, the higher the percentage of your transactions you record the more accurate your cash flow statement will be.
The groaning and eye rolling can be heard everywhere. How can anyone be expected to record and categorize every transaction? Who has time for that crap? On top of that a person is supposed to total all that up by category? I don’t think so! I have a life.
Yes, you have a life. You have a financial life and there’s an app for that.
EASIER BUT NOT EFFORTLESS
Just try a search for personal finance phone apps and you’ll find a metric ton of them. The best around according to thebalance.com is Mint from Intuit. Intuit is famous for Quicken and Quickbooks. They’ve been writing financial software for personal and small business use for decades.
Will this app do the work for me? No, it will streamline the process but you still have to put the information in. What it will do is all the totaling and create charts that will give you a visual of what your cash flow looks like. You don’t have to enter all of the categories ahead of time either.
You go to Fred Meyer’s and buy groceries; not precooked food. You buy food that you put together into a meal. When you enter that transaction it will be just like entering a check. You’ll enter the date the place you spent the money, how much you spent and the category, groceries. The first time you do this and you enter groceries the app will bark at you and ask what category the transaction belongs to. It’ll guide you through setting up a new category called “groceries”. Then you’ll finish the transaction.
The next time you go to Freddy’s you put your groceries in the car and hop in. BEFORE you leave, grab that phone and your receipt then enter it. You’ll enter the date and when you start to enter Fred, the software will guess Fred Meyer’s. The app will attempt to fill in the rest of the transaction information and it will automatically enter the category – groceries. That’s how it gets easier.
The ability of an app to remember what you bought, where, and it’s ability to do all the math is what makes it slick. All you have to do is enter the data. After all the transactions are entered with categories, the app does the heavy lifting. Another benefit to using an app is that you enter the data as you go. You don’t have to make time for another chore at home.
So I have this app for personal finance that will categorize my transactions. What good does it do me? Any time you want to, check the app and it will create a report that shows you how you’re spending your money by category and where your money is coming in from by category.
HOW IS ANY OF THIS USEFUL?
Because you’re so diligent about entering your transactions you have all this data about yourself. You know where your money is coming from and where it’s going. You can answer the question; Where is my money going? A cash flow statement can put in front of you some uncomfortable facts like:
You’re partying too much.
You’re spending too much on clothes just because you want them.
You’re car is nickel and diming you to death.
You’re eating out too much.
Frequently, you don’t know where the money is leaking out. It doesn’t seem like you spend as much as you do because you spend the money in what seems like small amounts. When you total up all those five dollar trips to McDonalds you find out that you’re spending a load of money. By the way, if you can spend only five dollars at McDonald’s, good for you. A Big Mac Meal is $5.99 plus tax that’s $6.35. Go with that three times a week and 4 weeks a month. That’s 12 meals X $6.35. That’s $76.20 a month. Seventy six bucks isn’t going to solve the worlds problems but if someone gave you that much you’d probably be grateful.
If you don’t know where you’re money is flowing in from and out to, your money is out of control. You won’t be able to create and reach financial goals. Even if your goal is to save enough for a gallon of ice cream every week you won’t be able to afford it if you don’t control your money and retain some to pay for it.
I DON’T WANT TO KNOW
And yes, knowing exactly how much is coming in and going out can be depressing. Is it as depressing as when the situation is at a catastrophic stage? This is how 21% of Americans have ended up with no retirement savings and 27% of Americans have no savings at all.
When solving any problem the first job is deciding what the problem is. After that, define what resources are available to solve the problem. Your money is no different. If you don’t know where the money is coming from and where it’s going, you can’t define what you’re up against or what resources you have to solve money problems. A cashflow statement is arguably the most important tool for defining the problem and the resources to solve it.
Use an app, carve the numbers in granite, or use paper and pencil. Create a cash flow statement and you will have a tool that will help you solve problems and get you where you want to go financially.