Cash Flow Measurement

by Mike Holman

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One of the financial activities that my wife and I decided to start doing this year was to measure our cash flow on a monthly basis in order to determine if we were spending more or less than our income. I believe the ideal way to monitor your finances is to keep track of every single financial transaction you make during the month. At month end you should be able to reconcile all your money coming in with money going out and then you can analyze where all your money has gone.

The only problem with that method is that it’s a lot of work to keep track of every single dollar you spend and we decided not to bother with that kind of detail.

What we decided to do instead is just do a much simpler calculation to figure out our net cash flow for the month. From this we can calculate the total amount we spent during the month and how much we saved.

The calculation is as follows:

1. Cash saved during the month = Cash Position at beginning of month minus cash position at beginning of last month.

2. Total money spent = total income during the month minus cash saved (from calc 1)

Note that the Cash Position is the net total of all your bank accounts, credit cards, and line-of-credits. It’s not important to do this at the beginning of the month but you should pick a time in the month that is consistent month to month. The first of the month works for me because I get paid at the end of the month and no withdrawals are made before the first of the month. It’s important to try to do this type of analysis over at least three months because of the normal variation in monthly spending.

This calculation tells you how much you saved and spent but no details on what the money was spent on. To try to fill in the gaps a bit, the next step I do is to look at our bill payments in our checking account as well as all charges on the visa statement and enter those entries into a spreadsheet which allows us to quickly see where about 80%+ of our money is spent.

I like this modified calculation because it’s fairly easy to do and gives us a lot of important information about our finances. We can always keep track of every detail if we feel the need to cut back a bit and need to know what can be cut, but until that time, this method will do.

An example calculation:

On April 1, Sue has $1000.00 in her bank account and owes visa $80.00.

On Mayl 1, Sue has $1250.00 in her bank account and owes visa $160.00.

Sue has a net income of $3500.00 per month.

We’ll calculate for the month of April.

1. Cash saved during April = ($1250 – $160) – ($1000 – $80) = $170

2. Total spending during April
= $3500 – $170 = $3330.00

Now this method is only a measurement of your cash flow and the resulting information needs to be further analyzed to determine if you are on track for your financial plans.

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{ 8 comments… read them below or add one }

1 MillionDollarJourney

I use a program like Ms Money (or quicken) which can quickly show your cash flow for the month based on typical bills and income. You should give it a try!

2 FourPillars

MDJ – my wife has a money program (can’t recall the name) which she used to use. We are considering doing a complete analysis for a month or two.

Mike

3 Mr. Cheap

I was going to do my cashflow tracking exactly the way you are doing it, except just with my bank accounts. The credit card variable was what scared me off (since it would move spending from one month into the next months expenses). Very good idea to just incorporate the credit card debt in your snapshot!

4 FourPillars

BP – thanks for the vote of confidence!

Mr. C. – I think the snapshot idea is the best way if you want a casual look at your cash flow. There are problems with credit cards because sometime the purchases don’t show up for a few days and go into the next month. I don’t worry about this because as I noted in the post, the normal variation in monthly spending means that the cash flow for each individual month could be quite different. Income can vary month to month as well.

Although I do monitor this calculation monthly, my goal is to be able to look back at the end of the year and see all the spending/savings etc for a meaningful time period.

If I can make a small criticism of some bloggers I’ve read – they seem to be too fixated on the monthly results and get upset if they have unplanned expenses or their net worth goes down. The reality is if you have a house, car, kids, a life etc you will have unplanned expenses once in a while. The net worth calculation is even more variable because it depends a lot on equity market activity.

Mike

5 moneygardener

I’ve never had the patience to actually track every dollar.

If you estimte based on your fixed bills and what you think you spend on other items who knows how far off you actually are unless you look at your savings rate. That’s why I like savings rate because it really shows you what you are spending as well.

6 FourPillars

Mr. C – yes it had crossed my mind :)

MG – I agree – just don’t have the patience and I’m not sure of the benefit.

Mike

7 Warren

Interesting way of doing things. I use Quicken and don’t find it too hard to keep up with. Its certainly worth the effort the longer you use it and the more historical information you have to look back on.

Brian why do you see leasing a car as a big money pit? Assuming you’re getting a new car anyway, there’s no down payment and you’re simply paying the depreciation on a monthly basis instead of up front.

8 FourPillars

Warren – it’s true that it would be nice to have more detailed historical info to look at.

I think the problem with leases is that they make it easier for people to get a new car every four or five years which is pretty expensive.

Mike

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