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Wealth Management & Cash Flow

Your personal Cash Flow statement is to help you understand where your money has gone. Very often we step into the habit of spending too much. Main reason is people do not understand their own personal Cash Flow statement and therefore fall into the trap of over spending.

A Cash Flow statement is basically a statement of your inflow of funds, normally called your income and your outflow of funds, normally called your expenditures.

What you need to do is list down your inflow of funds which are normally the following, income; interest payments; rental income; passive income; dividends; business income; etc.

As for your outflow of funds you need to list down all expenses and expenditure.

From here you would take your inflow minus your outflow of funds. If it is positive, it means you have a healthy Cash Flow. However, the percentage of healthiness is very important which we will share with you via our financial ratios.

If you have a negative Cash Flow, needless to say, you are living in debt. That is an absolute no, no.

Go to wealth experts and ask a wealth query with regards to Cash Flow.

Let us now share with you some financial ratios that you need to use to help you in your Cash Flow.

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Savings Ratio:
This ratio will show the portion of income set aside as savings for the future. Savings would include investments as well.

Savings Ratio =      Savings
                            Gross Income

A healthy Savings Ratio would have a % of at least 10% or more.

Financial Advice:
If a person’s savings ratio falls below 10%, your advice would be:
1.Re-budget and cut wasteful expenses
2.Convert those extra savings into savings plans or investments.

Liquidity Ratio:
Basic liquidity ratio shows the ability of an individual to convert his/her assets into cash easily. This will invariably show the number of months a family can contribute to meet its expenses with existing cash or cash equivalent assets after a total loss of income.

Liquidity Ratio = cash/cash equivalent (liquid assets)
                                        Monthly Expenses

For a healthy Liquidity Ratio, a general guideline is 3 - 6 months. Anything lesser will mean he/she does not have the required liquidity of 3 - 6 months for emergency.

Financial Advice:
If an individual does not have 3 - 6 months of liquidity, your advice would be to:
1.Re-budget and cut his expenses.
2.Those extra, put more into his liquid assets. (Banks, Deposits)