Cash Flow Statement with examples (2019)

Cash Flow Statement with examples

What is Cash Flow Statement with examples?

The cash flow statement like the income statement is established over a certain period. The SCF reflects the flow of money in to and out of a business over time. Unlike the balance sheet and income statement which are based on accrual accounting, the SCF is based on actual cash flows. 

 

In addition to preparing a statement of personal financial position, you need to track your ongoing expenses and sources of income. In this blog, we explain the Cash Flow Statement with examples.

 

A second reference document, the personal cash flow statement or worksheet, should be completed at least once a year (better done monthly, if possible). Here are the reasons why:

cash flow

The cash flow statement lets you see where you are actually spending your money (it will tell you whether you are living within or beyond your means).

  1. It gives you an idea of your ability to save.
  2. It pinpoints your financial strengths and weakness with respect to your current standard of living.
  3. It can serve as a practice document before preparing a budget for future cash flow management (the cash flow statement reviews past financial performance or looks backward, whereas the budget looks forward).

 

Just as the statement of personal financial position has three general categories (cash equivalents, investments, and use assets), so does the personal cash flow statement.

 

On the cash flow statement, you should separately identify cash inflows (sources of income), cash outflows (ongoing expenses), and any resulting cash surplus or cash deficit. A cash surplus or deficit is merely the difference between your cash inflows and cash outflows.

 

Of course, what you want at the end of the year (or month) is a cash surplus, sometimes known as discretionary income, because that amount is available for saving.

 

A little mental trick to help you save: include a fixed savings amount or percentage of income on the first line of the Cash Outflows column. In other words, pay yourself first, and treat the savings amount the same as you would any other fixed expense.

 

An ongoing issue with respect to the preparation of the cash flow statement is whether to show income and social security taxes as a separate expense or cash outflow (alternatively, you would show the after-tax amount among your cash inflows because your paychecks reflect this).

 

The better practice is to list these taxes as a cash outflow, because (again) one of the purposes of the cash flow statement is to show you how you are spending your money.

 

If you include a separate line item for income and social security taxes among the cash outflows, it forces you to account for what may be an otherwise invisible expense. The following is an example of a properly prepared personal cash flow statement.

 

PERSONAL CASH FLOW STATEMENT (FOR PERIOD 2019)

CASH FLOW STATEMENT

CASH INFLOWS

  1. Salaries $
  2. Bonuses $
  3. Self-Employment Income $
  4. Interest Received $
  5. Dividends Received $
  6. Capital Gains (from the sale of assets) $
  7. Rents and Royalties $
  8. Pension and Annuities $
  9. Social Security $
  10. Other Income $
  11. Total Cash Inflows $

 

CASH OUTFLOWS

  1. Savings $
  2. Rent/Mortgage Payments $
  3. Repairs, Maintenance, $
  4. Improvements
  5. Utilities $
  6. Auto Loan Payments $
  7. Credit Card Payments $
  8. Food $
  9. Clothing $

 

Insurance Premiums:

Insurance Premiums

  1. Life $
  2. Health $
  3. Long-Term Care $
  4. Disability $
  5. Auto $
  6. Homeowner (if not included in $ mortgage payment)
  7. Umbrella Liability $
  8. Total Insurance Premiums $
  9. Medical Expenses $
  10. Property Taxes (if not included in mortgage payment) $
  11. Income Taxes $
  12. Social Security and Medicare Taxes $
  13. Child-Care Expenses $
  14. Recreation and Entertainment $
  15. Other Expenses $
  16. Total Cash Outflows $
  17. CASH SURPLUS (OR DEFICIT) $

 

You may be wondering how both statements (the statement of personal financial position and the personal cash flow statement) tie together.

 

A cash surplus from the cash flow statement at the end of the year (or for whatever period you choose to list your income and expenses) increases your net worth, as reflected on the statement of personal financial position.

 

Conversely, a cash deficit decreases your net worth. Increasing net worth is a financial strength, whereas decreasing net worth (particularly if the decrease continues over a long period of time) is a financial weakness.

 

In other words, if a cash deficit continues (you are spending more than you are earning), you need to do something to reverse the situation. If you don’t, your financial goal of future wealth accumulation is impossible.

 

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Cash Flow and Debt Management

Cash Flow Management

As a matter of financial prudence, you should maintain an emergency or contingency fund for unanticipated expenses. This fund should be kept in liquid assets (those that may be converted quickly to cash without a significant loss in value) and equal in amount to three to six months of expenses.

 

(For example, if your monthly expenses average $5,000, you should have a contingency fund of at least $15,000—$5,000 times 3—in a checking, savings, or money market account or mutual fund.)

 

The size of this fund will vary depending on the nature of your employment and the constancy (or variability) of your income. A self-employed individual who has no employer to provide benefits to serve as a safety net (such as sick or personal days) should consider an even larger fund to compensate for lost income.

 

There is an investment trade-off, however, when establishing a contingency fund. This trade-off is a lower investment rate of return from money kept in more conservative cash equivalents.

 

For this reason, you may wish to consider establishing an unsecured line of credit with a bank or a home equity line of credit to substitute as emergency fund assets.

 

Be careful: if you do this, you must arrange for the credit line before the financial emergency occurs. For example, if you lose your job (for whatever reason), the bank is unlikely to extend you any credit.

 

Plus, if you are using a credit line as your emergency fund and you need to access the line once you have lost your job, you will incur even more debt—probably the last thing you need when you are no longer employed.

 

Let’s move on to a great tragedy or success story (depending on how you look at it)—the amount of debt carried by the average consumer. We read a great deal in the media about the negative savings rate of many Americans.

 

Is that bad? It depends. There is both good and bad debt. Good debt is generally any debt incurred for the purchase of an asset that is likely to appreciate—for example, your home or real estate in some parts of this country. 

 

More specifically, good debt is any interest rate assumed on an obligation where you are paying less than what you can make, in terms of investment return, on the asset for which you have borrowed the money.

 

Another example (in a rising stock market) is the margin interest incurred on the purchase of an individual stock or mutual fund from which you can potentially earn a far greater return than what you must pay the broker to make the purchase.

Bad debt

Bad debt is any debt incurred on an asset that is likely to depreciate in value, such as a new car or automobile. Another type of bad debt is credit card debt, which not only carries extremely high rates of interest (18 to 21 percent annually, on average), but also “revolves” from month to month so that it is very difficult to completely satisfy the obligation.

 

Both automobile and credit card debt share the income tax disadvantage that they are considered personal or consumer debt, which means that the interest paid generally is not deductible in reducing your annual income tax liability.

 

So how do you go about reducing bad debt? The obvious answer is not to incur it in the first place (by paying cash for a new car, for example), but often this is impractical. Here are some tried-and-true debt reduction techniques:

 

Focus on one type of bad debt to the exclusion of others. For instance, adopt a payment schedule and amount to pay off on your credit card debt—and stick to it!

 

Consider it another form of paying yourself: if the interest rate on the card is 18 percent annually, it is similar to earning 18 percent on an investment. (That does not mean, however, that credit cards are a good investment.)

 

Consolidate or restructure your debt. The most common example of this is a college or graduate student who consolidates several smaller loans into one larger loan. Although this does not eliminate the debt, it often reduces the total amount of debt service (interest).

 

Borrow from your cash-value life insurance or 401(k) plan. The advantage of these alternatives is that you are, in essence, borrowing from yourself. But be careful: you need to repay this money in a timely manner, or you will reduce the amount of your life insurance coverage and retirement plan benefits payable in the future.

 

If you die and still owe a balance on the life insurance policy loan, the insurance company will only pay the policy proceeds less the outstanding loan balance to your named beneficiary or beneficiaries. Similarly, if you leave your employer with an outstanding 401(k) loan balance, the company will likely pay only a net amount in your final paycheck or severance payment.

debit cards

Switch to debit cards. Debit cards work much like ATM machines because the money comes out of your checking account immediately. Although a debit card does not stop you from excessive spending, it does make you reckon with the cash-flow consequences much more quickly than would a traditional credit card.

 

Finally, it cannot be stressed enough that poor cash-flow and debt management can put you on the path to financial ruin. Fortunately, credit counselors and some financial planners can assist you in reducing your debt load.

 

If you think you have a problem with debt, you probably do! If you can’t solve the problem, the wealth-building techniques discussed in this blog will take much longer to work for you—if they work at all.

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