Knowing how much cash you have coming in and how much is going out is important, but knowing why and where the money is going is another level of awareness most don’t take the time to dissect. Whether you’re a business owner or non-business owner planning for retirement, having a handle on the cash flowing in and out of your bank can make or break you. Cash flow planning is imperative to financial success for us all. This short article takes a 30-foot view into a few reasons why you should know your business and/or personal cash flow.
Cash is King. Everyone knows money makes the world go round. It’s more than just the balance in your account. Bank statements provide a true depiction of cash management. In a business setting, cash flow statements show the true financial health of a business. This is because Profit and Loss Statements can be easily manipulated. You may look profitable, but that doesn’t mean you have the cash flow to pay your debts or replenish inventories to gain additional revenues.
Effectively plan for retirement. One of the biggest variables in planning for retirement is knowing how much you will be spending in retirement. How are you supposed to know what you need for lifestyle spending in retirement if you don’t know what you’re spending now? Chances are, if you’re accustomed to spending $10,000 per month while you’re working, you’re likely to spend the same, if not more, in retirement. For clients that know they’re making enough to cover expenses, but don’t really know what and how much, I always recommend getting in the nitty-gritty of lifestyle expenses. Whether that’s building a personal cash flow statement or downloading an expense tracking app, this exercise is so helpful in dialing into your spending habits. This really helps put money management in perspective, and most of the time, clients become more intentional with their spending.
Lenders are looking. Available cash in your accounts, debt-to-income ratio, and current debt obligations are all items lending financial institutions are analyzing in determining the riskiness of a prospective customer. What is the one thing all of these have in common? CASH. They need to confirm you have the cash flow coming in and can satisfy any and all debt obligations going out. When making a major purchase, lenders will want to see multiple years of bank statement activity. Having adequate cash and disciplined cash flow management will affect any and all lending opportunities.
As always, we recommend consulting with a financial professional to help you better manage your financial goals and needs.