Cash flow is a concept that we associate in most of the cases with companies and their management. However, it is good that we are clear from the beginning that people also have a cash flow. As entrepreneurs and for the management of personal finances, we should always learn to manage it. But to what end? To make good decisions based on your measurement, monitoring and analysis. Just like we would do with a company.
Expenses that we did not know existed, expenses larger than we thought, opportunities to expand our sources of income or make them grow and, therefore, a greater overall efficiency of our money. We can discover everything and achieve it thanks to cash flow management.
But… What is cash flow?
Among the financial statements of the companies we can find the Statement of Financial Position. We also have the Statement of Income, the Statement of Changes in Equity and the Statement of Cash Flows. The latter is an important tool for us to control 2 key concepts: liquidity and solvency.
When we have sufficient liquidity, we are able to meet all expenses. We also take advantage of all the investment opportunities we have in the short term. But without it, not only can we not do this but we can end up with insolvency and inability to pay commitments. In addition, we will also deal with the problems derived from it: discontent from suppliers, regulators, employees, customers and a possible bankruptcy.
On an individual basis, this also happens, it is not exclusive to companies. Hence the importance you know about cash flow.
In the cash flow we try to represent in detail all the income and expenses of cash that you have in a given period. Be it monthly, weekly or even daily.
How to make a personal cash flow?
The idea of making a personal cash flow is that you know the way you manage your money. In general you can start with the following steps:
- Open a spreadsheet in Excel.
- In the columns you will establish the periods; It can be per week, per month, depending on your needs.
- In the rows you will put the income and expenses. Income refers to all the money you make. On the other hand, the outputs are all the money that is required for you to operate, which includes your vital needs such as clothing, eating, expenses in your home, transportation.
From the sum of all your income you must subtract your savings and your expenses, what result did you obtain?
- Your income is less than your expenses: you are in trouble because you live on a loan to cover your needs.
- Your finances are balanced: although you are not one of those who spend more than what they earn, any unforeseen event can take you out of balance.
- Your income is greater than your expenses: this should be the scenario we all aspire to. You have the opportunity to save, as well as deal with unforeseen events and achieve your goals.
Depending on your results, you will have to adjust your balance and make a savings plan so that you can be in the ideal scenario.
How to increase your personal cash flow?
Now that you know how to calculate cash flow, it only remains to increase it. The truth is that this does not have much mystery, it is simple, you will see. The biggest problem lies in the personal part, in ourselves. Because knowing what you have to do and doing what you know you have to do are not the same.
We always have blocks, habits, beliefs that keep us from moving forward. To improve personal cash flow you can attack on two sides: income or expenses.
Make your expenses conscious
The idea is that you reduce your expenses, not to live in misery, but to adapt them to your ideal lifestyle. Keep in mind that many of your expenses are impulsive due to learned habits and behaviors, or because the brain has some need for pleasure.
You may be doing things that do not contribute anything, but that ruin your economy. Therefore, it is essential that you do an analysis of your expenses, which is necessary to calculate your personal cash flow. When you do the analysis you will have to determine how many are your minimum expenses, those expenses that you need yes or yes to live.
By calculating your minimum expenses you will be able to adjust at any time without major problem. Once you have this, the remaining expenses are the superfluous expenses that in this article I explain what they are and how to calculate them.
These are expenses that you can eliminate and that will not affect your survival level. Many of these superfluous expenses are not made consciously by you, so you should evaluate what they really contribute in your life.
When you have readjusted your conscious expenses, you will have generated a good surplus there, which we hope will allow you to have a surplus. But of course, the spending strategy, although it is necessary, is insufficient because it is limited, since there comes a time when you cannot reduce them any more.
So we move on to the next one.
Increase your income
If you work for someone else, the easiest thing is to increase your salary.
- Work overtime.
- Ask for a salary increase, but for this you must give more value first.
- Make up your mind to ascend.
- Change company.
- In the event that you are already trained in your company, try to generate an extra income in your free time.
That is, do the same work that you do in your company, but on your own. It is like creating a small business out of the same.
If, on the other hand, you are an entrepreneur and have a personal business, you can do this:
- Increase your revenue per customer by giving more value, which will allow you to raise your rates.
- Create sources of passive income that free up your time such as books, work affiliation with a list, online courses …
- In the end, what you need to do is get out of your comfort zone.
- Staying there is not going to give you anything, do different things to achieve different results.
Improving is possible
You need specific actions to improve and change your consumption habits. If you eat in the street, then you can save if you prepare your food. You can prepare your coffee instead of buying it. Scheduling the change of your wardrobe during the sales season may be another option. If your mobile phone plan is very broad, you may be able to reduce it.
Finally, it is about small things that although they are not seen at first glance, they make a difference in your income.
We hope we have given you a good view to improve your finances. Cash flow is key to your economy, plan it and you will see how it improves drastically.