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FP Article 14

What is a Cash Flow Statement?

by Rajen Devadason

Wealth is cash flow from other sources.

Brian Tracy

  In 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 surplus.

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.

Rajen Devadason

Web www.FreeCoolArticles.com










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.

Here are the 4 basic steps of constructing a corporate cash flow statement:

First, you begin with a company's net profit.

Second, you add back non-cash subtractions such as depreciation and amortisation. 

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 company's 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.

You want 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. 

All you 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.

That's it!

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 balance sheet).

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 money!

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. I urge 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

Web www.FreeCoolArticles.com






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