One of the first things you should do in managing finances is to understand the inflow and outflow of cash for a period of time. While a budget provides a plan for spending, a cash flow statement actually shows where the money came from and how it was spent. Learning to manage cash flow will prevent overspending and allow personal wealth building.
A cash flow statement contains three parts: sources of income, outflows of cash, and the net amount. Sources of income are more than just your salary. Income can be gifts, scholarships, and investment income. Anything that brings in money is considered income. Outflows of cash consist of all your expenditures, both fixed and variable. Fixed expenditures include rent, car payments, savings, and investments of those costs that remain unchanged from one period to the next. Variable expenditures might include food, charitable contributions, gas, and clothing. The last component of the cash flow statement is the net cash flow. This is the cash inflow minus cash outflow. A positive number is good and means you have extra cash to invest toward financial goals and build personal wealth or even pay down debt. A negative balance is bad and means outflow is greater than inflow. A plan must be created to spend less or generate more income. One cannot become a millionaire if there is a deficit of cash.
Managing your cash flow allows you to direct the cash. Understanding money flow keeps you in control!
Skill: Critical Thinking & Problem Solving, Communication, ICT Literacy
Directions: Using the description of cash flow above and your accounting understanding from Chapters 1-6, utilize your attained knowledge to apply it to a personal life situation to help solve the problems posed.
- Make a copy of this Google Document, rename it Cash Flow vs Net Income, and move it into your Part 1 folder.
- Utilize the information provided in the document as well as your own research online to help provide answers and solutions to the situations posed within the document.