Evaluating Your Personal Financial Status: The Cash-Flow Statement
One of the best tools to determine the condition of your personal finances is the cash-flow statement. It lists in detail your sources of income (cash inflow) and how your money are being dispensed with (cash outflow). The difference between cash inflow and cash outflow is called the net cash flow. A positive net cash flow means that cash inflows are being spent prudently as there is money saved for other purposes, while a negative net cash flow indicates an unhealthy money situation.
The components
Cash inflow may come from the following:
- Active income, such as income from employment, business, commissions and professional fees.
- Passive income, such as interests from savings and investments, capital gains from the sale of financial securities, like stocks and bonds, or rental income.
Cash outflow may consist of the following:
- Utility bills, food expenses, house upkeep, transportation expenses, education expenses, entertainment expenses, health-maintenance expenses, hobbies and grooming expenses.
- Long-term loans, short-term loans, insurance premiums and real-estate taxes.
The structure
The cash-flow statement is done for the current year, and the data is plotted per month so that net cash-flow transitions from month-to-month can be analyzed. Cash inflows should be categorized as either active income or passive income and segregated as to specific sources of income. For example, active income sources attributed to each contributing family member, such as those from employment and business, are presented separately. Passive income sources, such as rent and coupon payments from bonds, are also shown separately. If the family wants a full disclosure of all income sources, cash inflow should show 100 percent of income. Alternatively, only that percentage of cash inflow items that is allocated to cover cash outflow items may be presented. Income may be shown as gross income less all deductions to have a view of how much income goes into paying taxes and other government-mandated deductions.
Gross compensation income should include salaries, bonuses, fuel allowances and other perks converted to cash. Rental income should show gross income less maintenance expenses. All these are then added to come up with the total cash inflow.
Cash outflows should be grouped by expense category for analysis purposes. Examples are utilities, food, house upkeep, transportation, insurance, short-term loans, long-term loans and personal expenses per family member. As much as possible, the littlest of expenses are shown rather than grouped together as “miscellaneous” because doing so might hide expense items that can actually be eliminated. A by expense category analysis of cash-flow items will show you which categories need to be reduced or eliminated to improve the net cash flow. All these are then added to come up with the total cash outflow.
Other uses
The cash-flow statement format may also be used for cash-flow planning for future periods to determine the availability of positive cash flow to fund investment plans. It can also be used to determine living expenses at retirement so that they can be covered with a retirement plan. It can also be used to determine protection needs for dependents so that they can be covered with an insurance plan.
The bottom line
If you need to improve net cash flow, review your cash outflow items and eliminate unnecessary expenses, create new income sources, or change or defer the completion of some personal goals. Use the cash-flow statement to monitor your personal finances regularly and resolve issues when they appear. That way, you will be assured of a better and healthier financial life.
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Eve Reyes Mercado is registered financial planner of RFP Philippines. To learn more about personal financial planning, attend the 62nd RFP program this June 2017.
To inquire, e-mail info@rfp.ph or text <name><e-mail><RFP> at 0917-9689774.
Source: http://www.businessmirror.com.ph/evaluating-your-personal-financial-status-the-cash-flow-statement/
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