Cash flow process

“Measurement is the first step that leads to control and eventually to improvement. If you can’t measure something, you can’t understand it. If you can’t understand it, you can’t control it. If you can’t control it, you can’t improve it.” – H. James Harrington

I cannot emphasise more on the significance of the above quote as far as personal finance is concerned. I have observed that many people approach their finances in a very haphazard manner.  That is not an optimum approach. Just like CEO of a company, a person who wants to get hold of their finances should have only three targets, increase earnings, reduce expenses and building assets that eventually add to earnings.
 A first milestone in that direction is analysing their monthly cash flow statements. 

What is Cash Flow Analysis?

In very simple terms, a cash flow analysis is a study of how the cash is flowing, meaning, from where the cash is generating (income source) and where the cash is going (expenses). There are a lot of ways in which this can be done. The simplest being having creating a simple excel sheet and noting down all the entries under the income and the expense heading. I remember in my childhood days, my parents use to maintain a dairy for the daily expenses.

A sophisticated approach could be using mobile apps that can track your monthly cash flows. 

Following is the way my monthly cash flow looks like for the last six months. The red line is the expense whereas the green line is the income. Observe the dip in the month of January 2020? That is because, I have yet to receive my January salary 😀

Monthly Cash Flow

Once you have sufficient data over a period of few months you will realise what the major heads are, under which cash is going. Based on your individual needs and wants matrix you can then further optimise the cash flow. 

The way I did it was, initially, I cut done my expenses ruthlessly to a level where I could feel the pinch. Then after a few fighting episodes with DW (dear wife) arrived at the current optimum levels. 😃😃

The Process

After some permutations and combinations me and DW came up with a strategy. We do our finance audit annually, and decide on the amount that we can commit on a monthly basis for savings. At the start of each month, we transfer this pre-agreed amount into a joint account (Note:no ATM for this account). We have divided our monthly expenses amongst ourselves. I look after the utility bills/credit card/loan payment/fuel, DW looks after the household expenses/entertainment/dining/shopping etc😃 from our respective salary accounts. At the end of the month, once the salary is credited, whatever the amount that is left over from our previous salary is again transferred to joint account. This approach is quite flexible and we sometimes do deviate from our monthly targets. But it's ok, as long as we strive to achieve our monthly goals towards savings. 
We allocate our fix expenses like home maintenance, insurance premiums etc at the time of our annual finance audit upfront. We have built our emergency corpus in a similar manner.
The advantage of this strategy is that we live frugally by design and don't have to do much consciously to achieve self discipline with our finances.

Budgeting

The next step is to assign a budget to each expense head where you think you need to optimise your spending. 

Following are some examples of my monthly budget tracker under various heads (green line is the monthly target amount and red line is the actual amount spent.)

The advantage of budgeting is that it gives us a target and tells us exactly how we are performing with respect to the given target. It also removes the sudden urge to spend and imposes self discipline. This automatically controls our spendings thereby increasing our savings.

The above approach has been working fine for me over the years.

In order to achieve financial freedom, what you do with your saving is also equally important and will be the topic of my next post.

How are you optimising your monthly cash flow? 
Do you follow any other approach to optimise cash flow?

Please do comment in the comment section.