Cashflow: Its important in life of an individual or business

Cash inflow is the lifeblood of any individuals as well as in the business. Positive cashflow is very important to run a normal stress free life or even the business. Cashflow is divided in two parts Cash-inflows or called as positive cashflow and Cash-outflows or negative clashflows.

What is positive and negative Cashflow:

Cash-inflow comes from cash received like in case of individuals it is by receiving regular salary, interest or dividend received on savings/ investments. In business it comes from sources like payments from customers, receipt of a loan, monetary infusion from an investor, or interest on savings or investments. Cashoutflows are expenses like your regular expenses on household items like electricity, telephone grocery items, school fees, medical expenses, rent on house etc.,  in business to make your business run: expenses like stock or raw materials, employees, rent and other operating expenses. You need cash for meeting/paying for these expenses.  Cash is also important because it later becomes payment for things that.

Which one is better:

Naturally, positive cash flow is preferred. Positive cash flow means your personal daily life or business is running smoothly. High positive cash flow is even better and will allow you to make new investments (buy new car or home, hire employees, open another location) and further live luxuriously or grow your business. We love that, right!?! Conversely, there's negative cash flow: more money paying out than being coming in which is going to create problems as we need to borrow more to payout the expenses or deteriorating our current life standards or business.

What is managing Cashflow:

Managing you Cashflow is basically managing the income and expenses in a smart and prudent way. Normally we all know our income say in case of individuals it’s normally monthly salary and may be some interest or dividend from savings/investments. However when it comes to expenses we are not sure and have vague idea. Normally our cash-inflows are fixed but cash-outlfows are variable and much volatile as compared to inflows.

So how to manage our Cashflow:

To manage our cashflows firstly we have to get all the relevant details and pen it down. All the inflows on one side which may include salary, interest or dividend income, bonus or rent received etc. On the other side we must putdown all the expenses at least those which are regular like electricity , phone, credit card bills, school tuition fees, monthly grocery or regular items, transportation expenses etc. At the start of this exercise we may put some extra money on expense basket so as to get the actually status of the cashflows. Now lets find out how much is the difference between inflows and outlfows. If we get positive cash with us means we are at right direction. This extra money left should be saved initially in saving account or liquid mutual funds, Once we get the better idea about our cashflows we can start investing the surplus money in long term investment options like equity, mutual funds, physical assets etc with a proper financial goal in mind.

We should also keep in mind that the expenses may vary and not remain constant in all the months (like insurance or mediclaim premium once in a year, some special fees for a course, an unplanned visit to home town etc.  We should keep some emergency fund in our saving account or liquid mutual funds so as to meet those surprise on unplanned expenses. In the first year we will get the full idea about regular and one times expenses and will get the clear picture about our cashflows.

To some extent, we unknowlingly already manage our cashflows on a daily basis. However with proper planning we will not be caught unawares should there be need for money and will be able to take better spending decisions.

Once we are clear about our expenses we need to ask ourselves the important question: is the income minus savings equal to expenses or is income minus expenses equal to savings? Do savings comes first or expenses. What are the unnecessary expenses which could be avoided and money could have been saved instead of.

Once the cashflows are in order we should start saving the surplus money in the right investment products based on our financial goals like building an emergency fund, to achieve certain financial goals like owing a house or car, childrens higher education, self-retirement etc. We should also remember that to achieve different financial goals we need different financial instruments like we cannot cover a distance of 5 km by a plane similarly we cannot cover a distance of 5000 km by a cycle.

In our next article we will discuss various investment options to achieve different financial goals and also  how to manage cashflows in business.