Cashflow is King; Here’s Why

Do you ever wonder where your money goes? Do you find yourself having an influx of cash sometimes, and other times it’s tight? This is where knowing where your money is going and when is critical.

Once you spend cash it is gone. But, if you have cashflow, it keeps coming! While earning more might often seem like the solution to a poor cash position, it actually comes down to creating a steady and sustainable cashflow. We all need to live and pay for things and the best way to ensure we can keep doing that is awesome cashflow.

Think about the amount of cash you would need to have to pay your bills for the rest of your life. It earns nothing in the bank and burns a giant hole in your pocket when you have it, because we would all love to spend the cash we have. Cashflow, though, will give you what you need consistently, and if you build it right, it can continue to grow.

Where does cashflow come from?

Cash follows assets. In other words, to build cashflow you need to have assets. Unless you are fortunate enough to have parents provide you with wealth, you’re probably starting with nothing – or even worse than nothing: debt. The best way to navigate this is by putting away some of your income from the very beginning so, in time, you can build and buy assets that generate cashflow.

The more that you can do that, the more you be able to build up your asset base. The faster you build up your asset base, the faster you can build your cashflow. The faster you build your cashflow, the faster you are able to achieve financial freedom by having more cashflow than you need to live your life in the manner you want with the people you want.

How do I build cashflow?

It’s important to remember 2 key things. Firstly, everyone is after your money – as a result, you need to be conscious of how you spend it. Secondly, to ensure you don’t buy the stuff that you don’t need, the best thing that you should do is to pay yourself first. What does that mean? That means when you get that paycheque (or however you get your money), the first thing you do is put some of that money towards your asset column. Treat it as an expense and put it into that column so that you are able to build those assets and start generating that cashflow. Do that first, and you will learn to live within what you leave yourself with.

What is a cashflow statement?

So how exactly do you figure out what is happening with your money, and whether you are actually making money? As you are primarily concerned with cashflow you need to start with a cashflow statement. The best thing about a cashflow statement is that it only shows you cash in and out so you know what your cash position is like month in, month out. This generally isn’t something your accountant or financial planner does, as it is more designed as a tool for your own personal needs.

Does cashflow improve profit?

Having positive cashflow doesn’t necessarily mean you are making money, which is why you also need to have a profit and loss statement. Unfortunately, a traditional profit and loss doesn’t correlate very well with cashflow, as profit does not always equal cash.

Being profitable doesn’t pay the bills, cashflow does. Ideally, profit should lead to more cash. Where people come unstuck is where they are worrying about the value of what they are creating without thinking about the cashflow they currently have. This is why it’s important to assess what assets and liabilities you really have and whether or not they are generating cashflow for you.

Need guidance with managing your cashflow? Speak to the cashflow kings at PCR Accounting & Advisory today on 03 9847 7516