Unless you are in business or you work in accounting, you may not have come across the term “cash flow.” It is something that companies use to try and make sure they have enough money in their bank accounts to pay for their direct and indirect costs as well as their overheads. Without cash flow planning, most organisations will have difficulty in managing their money supply.
But the same thing can be applied to an individual’s personal finances too. However, there is a difference between business cash flow and private cash flow. Many businesses operate on a negative cash basis. In other words, they owe more money than they have or earn at any one point in time.
However, these businesses can go on trading just so long as they pay their various creditors in time or on an agreed schedule. This is where cash flow is key.
The use of cash flow analysis in business
Cash flow is nothing more than a money management tool, and when organizations are trading on credit (which most companies do as a matter of practice), it shows them where, or more importantly, when, they are in danger of being in short supply of the necessary cash. By being forewarned, they can then seek ways of ensuring they can rake in enough money to plug any gaps.
Producing and using cash flow statements is a fundamental management skill that all business need to employ, and you can find out more about this technique on the bizzonnect.standardbank.co.za website.
Cash flow and personal budgeting
As intimated above, cash flow can be used for private, individual purposes too. But instead of using it to manage money supply in order to control indebtedness, on a personal basis it is best used to prevent you from running out of money. Instead of being referred to as a “cash flow” this type of money management is usually called budgeting.
Whereas most businesses operate on credit, an individual person needs to live within his or her means; their means being the money that they earn. Although some people do live on credit, it is not to be recommended. If anything goes wrong in terms of income, or unexpected bills suddenly turn up, those living on credit can find themselves in hot water very quickly.
How budgeting helps
Once you get into debt for whatever reason, it is really difficult to get out of it again, and if you have to keep on putting off payment of credit cards bills etc. your indebtedness can quickly spiral out of control. The best way out of this type of situation is to create a personal budget plan. You can start this process immediately with this free budgeting guide.
A properly constructed budget does two things for you. It allows you to see precisely what you are spending your cash on, and it gives you the wherewithal to begin to manage your money.
It will enable you to either stop getting yourself into debt in the first, or, if you already in debt and are struggling to keep your head above water, it will show you where you can make cutbacks so you can afford to make the necessary repayments.
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