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The Money Prof

Wednesday, October 31 2012

"Cash Flow - Making My Life Easier"

I have learned that life is not all about money, but it took me some time to figure it out. We know that loads of money will not make you truly happy. Like health, it's one of those important things that will make you miserable, if you are lacking it, but if you are healthy physically and financially, it will take you so far and then you probably will need other things to increase and enjoy your quality of life. I am talking about such things as enjoyable relationships and activities. So, where does cash flow come into the equation?

The lack of adequate cash flow (funds being able to pay expenses and have enough discretionary funds to enjoy) is at the heart of the majority of families today. I can simplify this and blame insufficient revenues or excessive expenditures. The concept can readily be understood. Either find new sources of revenue or cut down on non-necessity expenses. Easier understood than done. The general rule is that operating expenses (short-term, non-asset accounts) should be funded with operating income (usually earned income from work). Capital expenses such as the purchase of larger items (usually accounted for as assets) should be funded out of "longer term" sources of capital. These capital sources usually are externally funded (loans) or the sale of other assets that are already owned (such as investments in stocks, mutual funds, real estate) can also be an important source. Many times the management of ones sources and uses of funds are done improperly, causing cash flow hardships. For example, a family decides on the purchase of various durable items (washer/dryer, television, computer). The cost of these items is $4,500. The use of credit cards is used. The family decides to make payments of $1,000 monthly to pay off the credit cards in 4.5 months. This is very admirable. However, for 4.5 months the cash flow of the family is cut short due to the high payments and anxiety and stress occur over the tight budget that has arisen. It is important to balance expenditures with the appropriate sources of income to smooth out cash flows. Sometimes, other assets can be liquidated to provide valuable sources of revenue to fund new expenditures. The important point here is that adequate and strong cash flow will make all the difference in making one's life easier.