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What is a Cash Flow Analysis?

Published: Tuesday, February 15, 2022 · Last Updated: Tuesday, February 15, 2022

What is a Cash Flow Analysis?

A cash flow analysis carefully considers all of the dollars flowing into and out of your life (“inflows” and “outflows”). Inflows could be as simple as your paycheck but would also include  gifts, proceeds from the sale of property, or an inheritance. Outflows include everything from what you spent on lunch today to the airline tickets you just bought for your dream vacation. Outflows also include fixed expenses like your rent or mortgage and any property or income taxes you owe each year.

Why is understanding your cash flow important?

Understanding each aspect of your cash flow is important from several financial perspectives. First, knowing how much money you earn can inform how much money you should spend. If you are spending all the money that you make now, how will you be able to save for retirement? A cash flow analysis can be the first step in establishing a spending plan if this is the situation in which you find yourself.

Conversely, where is the extra money going if you aren't spending everything you make? Is it sitting in your bank account? Has your bank account grown over the years, and you're not quite sure how to best use the money? There are almost too many options in today's world where you can put your money to work, and sometimes the easiest option becomes leaving it where it is. With inflation a constant concern, inaction can be costly. A cash flow analysis can help you identify opportunities to make that extra money work for you.

How can a cash flow analysis help me get a handle on my cash flow?

Organization is key – use a program like Excel or QuickBooks to keep track of cash flows and help you visualize the numbers. The first step is understanding your. A recent paystub should give you a good indication of your take-home pay.

The next step is having a good understanding of your expenses. Add up all your expenses over the last 12 months by analyzing your credit card statements and bank account withdrawals. Once you are aware of those two numbers, compare them - is there money leftover, or did you spend too much? Either way, you have options, but knowing where your money is going is always the first step.

How can Foster & Motley help?

One of our first steps with every client is to gather the necessary information to prepare a net worth statement and a cash flow analysis. These are both living documents that get updated anytime the data changes. Both are important for establishing a baseline for financial decisions.

Anyone can do this themselves with the tools mentioned above, but when it comes to the bigger decisions, a working relationship with the Foster & Motley team will come in handy. As your inflows outpace your outflows and your savings grow, our professional advisors can help you determine the best strategies to achieve your specific goals.