Cash Flow Equation

What is Cash Flow

Let's not waste time.

Income - Expenses = Cash Flow

The above equation is the basic equation for calculating Cash Flow. How much money do you have coming in minus any money you need to pay for expenses. If you take your monthly income and subtract all your expenses (housing, utilities, groceries, vacations, etc.) this would be your Cash Flow.

Having a negative Cash Flow would mean that every month you are spending money you don't have. "How do you spend more money than you make?" This could happen if you use credit cards and don't pay off the balance every month, or payday loans, anything that gives you the illusion that you have more money than you do.

Hopefully, in its simple form, we can understand the importance and make Cash Flow a building block for our financial journey.

Cash Flow Thought Experiment

For this thought experiment let's pretend you are a CEO, you pick the company. What do you think makes your company successful?

For example:

• Killer product
• Excellent marketing
• Strong customer focus
• Empowered employees

As CEO those are some things you might want in your company. But without proper Cash Flow, all the best intentions will lead you nowhere. Now say this company of yours has debt problems, you are spending more money than you are making. You now have some difficult choices to make.

Looking back at the Cash Flow equation there are two things you can do. Well.. technically three (for those of you thinking it), yes you could just not do anything.

First, increase your income:

• Sell unused equipment
• Create a marketing campaign
• Incentivize employees for more sales

Second, reduce your expenses:

• No unnecessary travel
• Negotiate with suppliers
• Lay off staff

I hope you can see that there are many different options for you as CEO to improve your company's financials but it is truly just increasing Cash Flow.

Pillar Stone to Personal Finance

Thought experiment aside, how can I use Cash Flow as a foundation for my finance? Just like a business to succeed, you must understand where the money is going, that is half the battle. There are many websites and apps out there to help you track where you are spending money, YNAB, Personal Capital, and Truebill to name a few.

The second half of the battle is much more difficult, most people roll their eyes when they hear it but hear me out. You must have a budget if you want to increase your chances of being successful with personal finance. Creating and much more importantly sticking to a budget will help you get your expenses into control.