Cash management plays an important role in ensuring financial stability. Since cash is used for buying and selling, you should first understand how you spend.
Do you often run out of money before the end of the month? Or maybe you have a surplus in your account? Whatever the answer, this first step is a realistic assessment that helps you analyze the comparison between income and expenses. This concept is known as cash flow management.
By analyzing cash flow, you can understand your income, spending patterns, and lifestyle needs. Therefore, a basic understanding of cash flow management is essential.
What is Meant by Cash Flow Management?
Cash flow management involves the process of monitoring and analyzing the movement of money in your finances. It consists of two main components, namely inflows (income) and outflows (expenses).
Cash inflow includes two main types, namely active income and passive income.
| Active Income | Passive Income |
|---|---|
| It is income earned from your job or business activities. When you stop working or no longer run a business, this active income will also stop. Examples include salaries and business profits. | It is income that comes from savings or investments, and is not dependent on your job. Examples include rent, dividends, interest, profits and royalties. |
On the other hand, cash outflows include fixed expenses, variable expenses and discretionary expenses.
| Fixed Expenses | Variable Expenses | Discretionary Expenses |
|---|---|---|
| Fixed expenses are recurring monthly payments for basic needs that have a fixed amount. Examples include housing loan installments, house rent, insurance premiums and child care fees. | These expenses are variable and can change from time to time. They include living costs such as food, clothing, utility bills and household necessities. | This spending refers to wants rather than needs. It is usually spent on things that provide satisfaction such as dining out, expensive clothes, air conditioning, TV subscriptions, entertainment and luxury home products. |
Next, we will learn how to use the cash flow statement by understanding cash inflows and outflows.
What is Meant by a Cash Flow Statement?
The cash flow statement shows the total inflow and outflow of cash for a specific period. This document serves as a basis for analyzing financial position. Efficient cash flow management can ensure that there are sufficient funds to meet all expenses and strengthen the financial situation.
How is Your Cash Position?
When total income exceeds costs, this indicates a cash surplus (positive). However, if expenses exceed income, it indicates a deficit (negative).
Total income exceeds total expenses = CASH SURPLUS
Congratulations! Keep up the good work.
Total expenses exceed total income = CASH DEFICIT
Please check and control your expenses.
In a negative cash flow situation, there is a high probability that you will need to obtain a loan to meet future expenses.
Expenses that match your income do not indicate a strong cash position. Lack of savings leaves you exposed to financial risk, especially if you lose your job or lose the ability to work.
To ensure a stable cash position, you should maintain a cash surplus. This surplus not only serves as a reserve to meet unexpected expenses, but can also be used for investments, thereby accelerating the achievement of financial goals.
The question is, how can you manage your cash flow to be in surplus? Preparing a budget is one of the most effective strategies.