PERSONAL FINANCE • READ TIME: 5 MIN
"More people should learn to tell their dollars where to go instead of asking them where they went."
Roger Babson
Tracking the Flow of Your Funds
In keeping with the financial planning theme established in a previous RP Wealth Advisors post – Why It’s a Good Time to Create (or Update) Your Net Worth Statement – this article focuses on the personal cash flow statement. As previously outlined, the two basic types of financial statements are (1) the statement of financial position and (2) the cash flow statement.
Generally, a cash flow statement, also called a “statement of cash flows,” seeks to summarize inflows and outflows of cash to reveal an individual’s (or family’s) saving, investing, and spending habits.
The following paragraphs outline the cash flow statement by dissecting its components – inflows and outflows (savings and investments, fixed, and variable). In addition to the analysis of each section in this statement, our RP Wealth Advisors Cash Flow Statement is available for your personal use.
What is a Cash Flow Statement?
The primary aim of a cash flow statement, for individuals, families, businesses, or when our team works with clients clients, is to understand the way in which money moves. Tracking inflows and outflows on a cash flow statement reveals cash receipts and disbursements over a specific period of time. It provides a static snapshot that can be used to understand habits.
A cash flow statement combined with a statement of financial position (a "net worth statement") provides sufficient detail and breadth for assessing overall financial health and well-being.
Inflows: Cash Received
Inflows, as the name indicates, represent received income. This category includes gross income and wages, interest and investment (dividends, for example) income, rental income, tax refunds, or any other type of funds received.
Special consideration and additional categories may need to be added to the cash flow statement when funds from a savings account, for example, are withdrawn. Although there are a number of “special situations” that may necessitate amendments to the worksheet, the basic categories and types of inflows are provided.
Outflows: Cash Disbursed
Outflows are divided into three general sections: savings and investments, fixed expenses, and variable expenses. Some of the contents in the fixed and variable sections may be appropriate in either location (is "Food" variable or fixed?), but, generally, the emphasis is placed on the bottom line. How is cash being spent, and to what extent may some of the variable expenses be reduced to help meet savings, investment, or debt reduction goals, if necessary?
Savings and investments represent the money put aside into said accounts – savings accounts, retirement accounts, or other investment vehicles. Fixed outflows are predictable and recurring expenses where there is not much leeway in terms of modification. Variable expenses, though, are those expenses where you have a greater degree of control (relatively “high” outflows for “Food,” for example, may be reduced by dining out less frequently).
Of the three Outflow categories, “Variable Expenses” are often the most difficult to track. Compiling this information for a given period may require a deep dive into credit card and bank statements, but can be made simpler using various financial apps that automatically track and categorize your spending.
A Note on Taxes and Footnotes
Tax information (technically another “Outflow”) is most commonly found in cash flow statements that capture an entire year of inflows and outflows. They can, however, also be included in monthly statements (as they are in the downloadable worksheet) if (1) figures from the previous tax year are projected onto the current tax year, or (2) it is reasonable to make certain assumptions for the current tax year and input these into the statement.
Footnotes, as with any other type of document are used for the purpose of clarification. They should be used in a cash flow statement to clarify circumstances not enumerated in the body of the document. For example, a footnote may be added to the “Mortgage” outflow line to clarify the principal and interest of the loan.
Working Through the Downloadable Worksheet
Click here to view and download the worksheet: RP Wealth Advisors Cash Flow Statement
Now, with an understanding of the sections that make up a cash flow statement, you are equipped to develop your own. After compiling relevant pay, tax, account, credit and debit card, and/or bank statements, you can begin to plug the numbers in to the worksheet linked above to calculate your inflows, outflows, and net cash flow.
A positive net cash flow indicates you have a surplus, and a negative number means you are at a deficit (spending more than is being received). If money coming in (inflow) and going out (outflow) is relatively similar, then your net cash flow is neutral.
Like a statement of financial position, the value of this exercise is to develop an awareness of your holistic financial status, and to track the receipt and disbursement of your money for a given period of time.
How We Use a Cash Flow Statement
Knowing how your cash flows can help you make better decisions with your finances, and can aid the RP Wealth Advisors team in providing you with sound, comprehensive financial advice.
In an ideal situation, a client has sufficient available resources to address all of their needs and goals at the same time. However, in reality, it is often that case that there are conflicting demands on available cash flow. The RP Wealth Advisors team provides guidance and sound financial planning on how to resolve such conflicts.
Our process includes goal discovery and prioritization, exploration of alternative funding methods, debt reduction and/or payment restructuring, and suggestions (when applicable) on other possible sources of income. Ultimately, the way in which our team assists you in working toward your goals is up to you – our duty of loyalty and care to our clients affords us the opportunity to provide advice and guidance, but our clients make the final decision in terms of goal prioritization, etc.
Holistic Financial Assessments and Planning
A personal cash flow statement provides a comprehensive overview of what is moving coming in and going out of your accounts each month. A cash flow statement tells you where you are, and may even be used in tandem with a personal budget for planning purposes to help achieve a positive net cash flow. A cash flow statement and budget are further complemented by your statement of financial position.
Each of these personal financial planning statements are integral tools for our team in developing holistic plans and assessing financial wellness for our clients.
If you are interested in learning more about the preparation of a cash flow statement, statement of financial position, or budget, let the RP Wealth Advisors team assist you in your financial journey by clicking here to connect with us.
The content is developed from sources believed to be providing accurate information. All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy referenced here will be successful. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by RP Wealth Advisors to provide information on a topic that may be of interest. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.