What is Cash Flow and how it affects absolutely everyone? Even if you don’t own a business…
Every single country is very similar to a business. GDP being the revenue for the product or services offered by each nation. If a government functions like a company it means that a lot of the rules which apply in business will be present in society.
What exactly is Cash Flow?
Cash flow is basically money coming in and out of a company, and it is crucial to understand/analyze if one wishes to succeed in business. In a simpler way it could also be seen as the movement of capital or income and expenses.
The more technical definition according to Investopedia is, “Cash flow is the net amount of cash and cash-equivalents being transferred into and out of a business.”
-Money coming in & money going out.
If an entity has more money coming in than out, it may mean that operations are doing well and that the business is healthy. When there’s more money being spent than earned it could mean that the company is in its initial stages or that it’s in an unfavorable situation.
Why does this impact our economies?
To understand this question it is essential to comprehend what drives an economy.
Spending
The flow of money determines the financial health of a country. That is why central banks control interest rates.
- Lower interest rates mean more lending which is then equal to more spending, essentially pushing the economy forward.
-Higher interest rates means less spending which then levels of the value of money.
The more money flowing, the better.
So, given that governments function in this fashion it’s crystal clear why it’s important for a nation to strive for the greatest output of goods and services that it possibly can.
Due to this, countries should strive to have well educated and prepared citizens. The more knowledgeable a population is, one could assume the better the specialized skills & labors, creating markets for very specific demands which would then create great revenue.
High revenue due to well educated people will inevitably lead to greater spending because people have more purchasing power. The greater amount of disposable income citizens have the more beneficial it can be in an economy.
Cash Flow affects absolutely everything.
How it affects EVERYONE?
Banks, companies, governments, the local coffee shop in your area, what do they have in common? They all see the financial system the same way.
P&L (Profit and Loss)
One very common example of money coming in and out can be seen in banks. When you’re approved for a mortgage you’re essentially paying the bank monthly installments for a predetermined number of years until the debt is paid back. On top of that, there is usually interest applied to it which may be the profits of the bank.
The bank is aiming to lend money with an interest applied to it in order to come out profitable. At the same time they use that same money to invest into other projects, creating more revenue for the organization. While all this is happening money is being spent, which drives the economy, helps companies grow, creates value, and may enable distributions in the future.
At the end of the day it’s all one major P&L (Profit and Loss) sheet.
It’s literally in front of our faces in almost everything, so it’s imperative to understand that YOUR personal expenses work VERY similarly.
How it can absolutely CHANGE your life for the better?
We as individuals have our own income and expenses, meaning that if truly analyzed deeply we can learn exactly where our money is going and modify it for the better.
List your monthly expenses: Rent, food, utilities, subscriptions, entertainment, loans, etc.
Expenses you have = Money going out.
Then list your income: Job, side hustle, dividends, etc.
Income = Money coming in
See where I’m going?
At a personal level we should have more money coming in than it’s going out, and that is precisely what many fail to understand. Society is overwhelmed with unnecessary spending which then leads to miserable lifestyles and depression.
If you can grasp this concept correctly however, it may lead to peaceful happier moments.
Once one understands this concept everything can change.
How you can START to improve?
My favorite part about this is looking where every single penny is being spent on. Personally I would take the following steps in order to improve my economic situation.
(THIS IS JUST MY OPINION, be analytical with what you decide. This is just my personal point of view.)
- Look very closely at your expenses.
This is by far the most important step because one must identify what our major expenses are and if we can reduce them or eliminate completely. Of course this varies from person to person. Also needless to say, we should KEEP what is absolutely essential for our well being, we shouldn’t risk our health if we don’t have to.
2. Decide what you can reduce or take out completely.
A lot of times we spend a lot of extra income in material objects or unnecessary distractions.
Be quick to identify them and change if needed.
3. Analyze your income.
Once expenses are in control be self analytical and see how you can improve your income. Look for ways to create another revenue stream so that the MONEY COMING IN IS GREATER THAN THE MONEY GOING OUT.
Our income is very related to the level of skill or trade that we have an expertise on. The more specified the profession or the tougher it is to do your job the more it may pay.
So it is important to become the very best version of ourselves in order for our labor to be worth more.
“You get paid in direct proportion to the difficulty of the problems you solve.” — Elon Musk
4. Save MONEY!
Try to save as much money as you can, we never know what can happen and it is always beneficial to have somewhat a cushion to fall on if something unfortunate happens.
Also, if we save money, in the future we could use it to invest in ourselves or on another revenue stream in order to grow our income even more!
Be Smart about your money!
5. Make money work for YOU, not the other way around.
If you wish to spend more or earn a substantial amount more, then you should use some of the money you saved to make it work for you.
You could start a business, invest in a retirement plan, invest in real estate, there are simply innumerable ways to make our money produce more for us.
Closing thoughts
Before writing this, I already understood how crucial it is for us to understand how money works.
Truth be told it sounds so effortless to say, but very few people comprehend it correctly. Truly I believe many could potentially become wealthier in the future if they realized how to manage their finances better.
In the end we’re all part of societies with different values and cultures; However, when we analyze money it’s always the same language. The language of money is straightforward. Anyone can achieve anything they want (as long as it’s legal) specially when talking about monetary goals.
We just have to understand cash flow for everything else in society to make sense and fall into place.
At least that’s what happened to me.
Cash flow will not care if you think it does or doesn’t affect you, it will just exist. Be smart about your expenses, work both hard and smart for your income, save money, and invest.
Money is easy to understand.
Difficult to master.
Work on cash flow today & reap the benefits tomorrow.