There are a few different types of financial statements that can not only help corporations run efficiently, but also families. Two common statements are a Net Worth (or Balance Sheet) and a Cash Flow Statement. Each of these paints a slightly different picture of a company’s or a family’s financial situation.
This article will explain more about how to prepare a cash flow statement and why it is critical to end the paycheck to paycheck cycle. While I am writing from a household budgeting perspective, business owners will find this information equally helpful.
What is a Cash Flow Statement?
Before we go any further, I will define what I mean by a cash flow statement. By the name alone, we can understand it to mean money flowing in and money flowing out. The most important aspect that I am writing about is the timing of the money flowing in and money flowing out. During any period of time, a cash flow statement should have a positive or zero amount. This means you are spending less or equal to the amount you are earning.
Why is it Important to Understand Your Cash Flow?
If your cash flow is a negative amount, that means you are spending more than you are earning. Meaning you are likely increasing your credit card debt. Which leads to paying interest on the outstanding balance. This increases your monthly budget, because the monthly minimum credit card payment has increased.
You are also likely to incur late and overdraft fees, because you may be short during the month to pay your bills. I recently worked with a client who incurred hundreds of dollars in late and overdraft fees every month. She did not understand how to estimate her weekly cash flow. She would pay bills due based upon the balance in her bank account. She did not know how to plan for upcoming large expenses (i.e. rent) and would come up short or write checks knowing they would bounce.
How Can I Prepare a Cash Flow Statement?
There are few different approaches. Below are two examples that can be used independently or together. No matter how you prepare your cash flow statement you will need to include the following:
- Beginning bank account balance
- When you get paid and the amount
- List of bills with their due dates and amounts
- Projected ending bank account balance
Use a Spreadsheet
You can make your own spreadsheet which is frequently the best solution. Make it as simple as possible. But if you want one already made, try this Excel sheet from Vertex42. It’s straightforward and easy to use. No matter how you set up or use a spreadsheet, make weekly projections. This is because the timing of your paycheck is critical and you may not be so apparent if you are preparing monthly projections.
Use a Calendar
For the visual learner, a calendar with sticky notes can help you to better understand the concept. Print from an online calendar such as Calendar.com.
Use different color sticky notes to represent expenses, income, and savings. For example:
- Fixed and variable expense – Yellow
- Sources of Income – Green
- Savings accounts – Blue
This visual will give you an idea how money is flowing (hence cash flow) in and out of your accounts.
Another reason to prepare a visual calendar is to better match the receipt of income to when your bills are due. You may see that your credit card payment is usually due a few days before your paycheck. This may be the reason why you are frequently late in paying that bill. You can call your provider to request a later due date.
If you are living paycheck to paycheck, you need to clearly understand the ebb and flow of money coming in and going out. A cash flow statement is the best way to make sure you have the money to pay your bills, to stop increasing your credit card balances, and to avoid unnecessary overdraft and late fees.