Effective cash flow management could either mean heading out to a fancy restaurant for your anniversary or rustling up an exotic meal at home. Cash flow refers to the in and out motion of money.
Simply earning income and paying bills doesn’t qualify as cash flow management, that’s survival. Cash flow management involves understanding the components that make up where the money comes from, where it goes, and what choices are appropriate in creating a life of greater satisfaction. It is an active process. There are four components to it:
Components of income
Income can be derived from salary, bonus, hourly, self-employed, rental or investment sources. In some cases, you can control your income—working longer hours or a second job or choosing investments that provide higher levels of income. In most cases, control is limited.
It is foundational costs over which you have little control. For example, rent, EMIs, salaries, transport, school fees, electricity and mobile bills, food and grocery. These come every month and while you might move to a slightly cheaper apartment, this category is pretty locked in. A structural change might mean, moving to an area where property costs are less or moving into a smaller home.
Discretionary expenses
Here you make choices and therefore, more control can be exerted.
For example, you can shop online or at premium name brand stores that feature the allure along with higher price tags.
Savings
Do you save regularly and systematically or do you save when there’s something left over? Savings is our opportunity to capture and secure our wealth. The better choices you make, the more wealth and security can be derived.
To put cash flow in order you need to first collect details of all your income, then track your overall expenses in details and also have money to set aside for savings.
If you find yourself unable to save, you can start by transferring a small amount every month in another account as soon as you get your salary. Once you have understood your cash flow, you can start your investment plans.
Remember that a proper cash flow management is the foundation for building a strong financial plan.
(Nisreen Mamaji is certified financial planner and founder of Moneyworks Financial Advisors)