PERSONAL FINANCE 10: THE WORKINGS & USES OF A PERSONAL CASH FLOW STATEMENT WITH NO EARNING ASSETS 1

A personal or household Budget is useful in ensuring that you or your family do not live beyond your means. However, a Budget is not adequate in clarifying the financial issues confronting an individual or household. Personal Financial Statements will make clearer where the financial problems lie and how best to solve them, how to avoid financial problems, how to plan for growth in the personal or household Net Worth (i.e., what you are really worth).

Your personal Income Statement and Cash Flow Statement, taken together, can tell you if are earning enough or why you are always in deficit.

First, you have to make sure that the Direct Costs (related to your earning a Salary or a professional fee) leave you enough Cash to meet your Personal Expenses.

If your Direct Costs leave you insufficient Cash to cover Personal Expenses, any of the following financial outcomes (or a combination) will occur:

1 You will end up with a negative Net Inflow (total of Inflows minus total of Outflows) and, consequently, a negative Ending Cash –which will eat into your Savings Account (that is, if you have one).

2 You will have to postpone payments of bills that fall due. Sometime in the future, these bills will have to be paid (Accounts Payable Payments). At that point, your negative Net Inflow will increase –further aggravating the negative in your Ending Cash.

3 You will have to take out a loan to meet current personal Expenses or pay overdue bills. Interest on Loans and the principal of the Loan itself have to be paid at some future time –in which case your negative Net Inflow will increase further.