Determining Cash Flow
Income Statements are a View to One's Short-term Financial Health
Jun 21, 2009 Christopher Pascale
The average person does not keep detailed accounts of what they make versus what they spend. When matched with easy access to credit from eager lenders, the results can be devastating.
Determining the direction that cash is flowing in one's life is crucial, and setting up an income statement (also called a profit and loss statement) is easy.
Determining Income- Cash Flowing in
Income is not a complicated idea, but accounting for it accurately is very important, which is why keeping records is crucial.
The average elementary school teacher in the United States, according to PayScale.com, earns roughly $40,000 a year. At this salary, teachers are currently in the 25% income tax bracket, allowing them to take home $2,500 a month. In keeping an accurate log of income, a teacher will list "salary" with the amount of $2,500, just as this business does with sales.
From here, any other income will be listed separately before being totaled. These can be monies received from an eBay business, a second job, gifts, alimony, college grant money, or a lawsuit settlement. The money listed does not have to be taxable, but all cash flowing in should be noted for accuracy.
After incomes are determined, expenses need to be listed.
Determining Expenses- Cash Flowing Out
Expenses involve all things that cost money, and may have variations from month-to-month.
Some expenses, such as utilities, groceries, and mortgage or rent payments, will always be there, but other expenses, such as salon appointments and prescription co-payments, can slip by without being noted if one is not diligent.
All expenses need to be kept track of, regardless of their importance. Medical payments and money sent to pay off debt are not more important on a ledger sheet than entertainment expenses and money given to charity. They all apply contrarily to income, and must be noted. Additionally, money that funds an investment is listed under expenses. The reason for this is not because investing is risky, but because cash is flowing out.
The equity that is built in investments will be noted on a balance sheet, which measures assets and liabilities to determine positive or negative net worth.
In addition to expenses that have been tracked, it is not always possible to log every expenditure. For this reason, an assumption of unaccounted spending should be noted. A good rule is to figure it to be 5-10% of total income.
Income Versus Outgo- the Moment of Truth
When all incomes and expenses have been added, the final step is to subtract expenses from incomes. If income is greater, then the monthly cash flow is positive. If expenses are greater, then the cash flow is negative.
The key to maintaining financial records is to have a clear, accurate depiction of where one stands. Just like going to the doctor for a check-up to determine personal health, it is important to maintain a monthly profit and loss statement to understand financial health.
Cash Flow is Identified in a P&L Statement
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