FP Article 14
What is a Cash
by Rajen Devadason
Wealth is cash flow from other sources.
financial planning, there are two
statements of paramount importance:
your net worth statement (NWS) and
your cash flow statement (CFS).
The two are
linked. If you manage your personal
cash flow well, then you will
consistently generate a cash flow
At the end of each
'accounting period', be it one day,
one week, one month or one year,
your surplus cash is reflected as a
fattening cash balance in the asset
column of your NWS!
So, it's crucial each of us learns to manage our
cash flow well. Thankfully, putting together a
personal cash flow statement is much easier than
constructing a corporate cash flow statement.
To prove it, in a moment I'm
going to explain what goes into putting together
a company's cash flow statement. I'll then tell
you how to construct a much simpler personal
version of this fabulous financial tool.
This is an article explaining what a
cash flow statement is. I hope you enjoy
reading it. But if it isn't what
you're looking for, you're welcome
to search for something that better meets
your needs. Thank you for allowing
me to serve you.
A corporate cash flow statement is used to gauge
the health of a company. That's why financial
analysts around the world use the cash flow
statement as a primary tool in constructing an
'earnings model' of an enterprise. This is not
like an architect's model, which is a mini
construct that exists in three-dimensional
space. Instead, an analyst's earnings model is
usually constructed in cyberspace using a
computer's spreadsheet program.
the 4 basic steps of constructing a corporate
cash flow statement:
First, you begin with a company's
Second, you add back non-cash
subtractions such as depreciation and
Third, you subtract cash-based
transactions such as capital expenditure and any
dividend payouts. You do this because such items
are not taken into account when arriving at a
company's net profit.
Fourth, after all these
ebb-and-flow readjustments, you then take a long
hard look at the final number to determine the
net cash movement for the year.
If it's negative, that's bad. It
suggests the company needs to erode cash
reserves, go deeper into debt, or initiate a new
cash call to investors to finance its deficit.
If, however, the net cash
movement is positive, that's great news. It
means the company is a viable cash cow.
From a human
perspective, your goal is to turn your economic
life into a cash cow!
So, should you bravely decide
that you will eventually construct your own cash
flow statement, please bear that corporate
lesson in mind.
to manage your financial affairs in such a
responsible way that you are a net generator of
cash, not a net destroyer of it.
Unlike the painful intricacies of
trying to work out a corporate cash flow
statement, an individual's cash flow statement
is far simpler to pull together.
really need to do is take a piece of paper - or
power up your Excel spreadsheet program on your
PC - and list all sources of cash inflow and all
cash outflows. Then subtract your aggregate cash
outflows from your total cash inflows.
In my opinion, it would be a good
idea for each person to carry out such an
exercise each and every month.
Your goal should be to generate a
healthy cash surplus - before savings and
investments - each month so that you'll
consistently be able to channel this excess into
the asset column of your net worth statement
(which is the human equivalent of a corporate
Doing so faithfully allows you to
force your money to work for you, instead of
adopting the far more conventional approach of
spending your entire adult life toiling for
The key concepts behind
constructing a cash flow statement - for an
individual, at least - are not hard to
comprehend. Yet surprisingly few people ever
bother to even try.
you to join that special minority.
In doing so, you will be heeding
the fabulous advice of Dr John F. Demartini:
"Don't spend your life working for money; save
money and hire it to work for you."
Personal finance guru Robert T.
Kiyosaki often says: "The poor and middle
class work for money; the rich have money work
for them." Clearly, your first real step
toward joining the ranks of the world's robustly
wealthy is to gain or regain personal control of
your cash flow patterns.
Aim to generate a strong, steady,
high quality cash flow surplus every month...
or, better yet, every day!
© Rajen Devadason