Money is the lifeline of every business. Lack of money is one of the main reasons businesses fail. Cashflow is the amount of money a business has coming in and going out. Proper cash flow management is essential for the survival of a business.Suppose you are a person who is concerned about your financial situation or achieving your financial goals. It’s essential to master the art of cash flow management as a self-employed.
Cash Flow Management: What is it?
Cash flow management is the process of tracking your cash flow. It helps to predict how much money is coming in and how much is going out. With cashflow management, you estimate the amount of money that you can use for business investment as well as plan for all expected expenses. Also, cash management prepares you for unexpected costs such as emergency hospital bills or a car breakdown.
Unpredictable things are the parts of life. Effective Cash flow management makes a separate room for all these situations. Well-planned cashflow budgeting saves you from serious financial position on rainy days.
Step By Step Process for Effective Cash Flow Management
Cash flow management is essential for self-employed persons, especially if they want to grow their business. Here are a few steps to help you achieve your financial goal through effective cash flow management.
Step 1: Make a Budget for all of Your Living Expenses
No matter how much you earn or what are the ways you make money. You must understand your living expenses. Get detailed information on all of your living costs.
● It would be best to understand your monthly living expenses here.
● You must also go through the details of your quarterly and annual expenses for long-term
planning.
● Include your birthday and festival one-off and holiday expenses.
After making a round of your expense, you need to calculate it according to the inflation rate and rising prices. If you forgot some other costs, you would add them here.
Step 2: Keep Track of Cash Flow with Two Separate Accounts
In the second step, you need to make two separate accounts. One account is for receiving the income, and the second account is for living expenses. In the second account, you must include your income tax expense.
No matter how much you get paid each month, your payment will get into the first account. You will transfer a set amount according to the budget in the second account.
● It will help to create a base for your salary. Further, it enhances consistency and reliability.
● It helps when you get a bonus or more work from your job. Instead of spending it on unnecessary expenses, you can easily put the excess funds aside for future plans.
Step 3: Regularly Review Your Budget
The third step for good cash flow management is regularly reviewing your budget against the calendar. You can estimate what upcoming events are ahead or what upcoming bills are on the list. Keeping an idea of pending bills is also critical for effective budgeting. Ideally, you should pay your bills on or slightly before the due date to avoid collection expenses.
The pre-planned budget also helps when you are not earning much, but still, you have the required amount in your account for living expenses. It’s because you have drawn money separately for future monthly payments before.
In the months when you are not earning, reviewing the budget will help you cut the unnecessary expenses, but it’s effective only when you make a budget ahead of time.
● Create an emergency savings account
Creating a third account to put money aside for one-off or unexpected expenses. You can call it a Life Saver Account. You can build it by putting extra money in this account each month. It will save you from unnecessary financial headache during days when business is slow.
This account helps when you have unexpected maintenance at home, or your car or dishwasher needs repair. The emergency savings in your life account can help you overcome these expenses.
Step 4: A Holiday Savings Account for lifestyle Goals
These savings will help to achieve your lifestyle goals. Like if you love traveling, you can save money here for it. Or, if you want a car, this account will help you achieve this goal. No matter how much money you put into this account, don’t worry; you are hitting in the right direction.
Step 5: Build Your Cash Reserves with an Investment Account
You can put aside extra funds in an investment account. In the long run, you can invest the accumulated funds in a passive income stream or the stock market depending on your choice. Get some finance and investment education to guide you better on the subject of investment.
Parting Thoughts
Cash flow management is a financial management system used if you want to get your money on a smooth track. Further, you can achieve your financial dreams and goals with it. It ensures the effective use of money as well as saving for investment. Effective cash flow management will never put you in a situation where you are short of money for your business or living expenses. Therefore, you should consider the use of of budgeting and cash flow management vital for your financial success and freedom.