Why is cashflow so important??
Cashflow is a crucial part of survival in today’s world. No matter if you are in business and managing cashflow for the company, or you are a family and looking after cashflow to see you through your monthly expenses. Cashflow becomes the most important aspect of financial management.
Without cashflow control, you can unwillingly find yourself in financial trouble.
It’s important because it is only cashflow that see’s you being able to handle the financial challenges from day to day or month to month.
A cashflow event occurs every time there is a financial transaction between two parties. Businesses trade goods to consumers (that’s you and me). Cashflow becomes important for us to sustain our everyday lives.
When we need to buy a tank of gas or make a house payment, cashflow is important. Why? Well, let’s examine. It’s a lot easier to pay the mortgage when the money for the payment is in the bank account.
So let’s examine two circumstances to outline why cashflow is important. In both scenario’s let’s imagine that we have $1000 in the bank account and we are one week away from being paid again.
We have received a bill from our child’s school for the amount of $270 for books and supplies they need for the term. The bill was stuck to the fridge, forgotten about and the due date is today.
Also in both scenarios let’s imagine that we have a mortgage payment due in 5 days time (don’t miss these or you risk getting your house repossessed) for the amount of $850.00
SCENARIO 1
We realise that the bill is due today. It is for $270, and as we check our bank account we confirm that there is indeed $1000 there and we pay the bill on time.
Unfortunately when the mortgage payment is attempted to come out, it defaults as even though it doesn’t come out for another 5 days, there is now only $730 in the account and the $850 ‘bounces’.
This results in a serious black mark against your credit rating. This can affect you for a very long time. Your credit rating is what allows you to make significant financial transactions in the future.  You may not lose your house on this default, but it has happened before.  And you think to yourself as you watch them auction off your house at a mortgagee sale, if only they’d taken the payment out a few days later, my salary would have been in and everything would have worked out differently.
SCENARIO 2;
We realise that the bill is due today. It is for $270, and as we check our bank account we confirm that there is indeed $1000 there. Then we look at our cashflow management program and also see that the next mortgage payment is due, before the next salary payment is due and if we pay this bill today we are going to default on our mortgage.
At this point we call the school and explain the situation. We ask that we can pay the bill late as we know our salary payment goes into the account in one weeks time and we have always been good payers so far. Although the accounts department are not happy about it, we agree with them to pay $100 today and the balance in one weeks time when the salary goes in.
The mortgage comes out, the account is still in credit, salary goes in and we pay the final payment to the school as agreed.
That is why Cashflow (Cash Flow) is so important. It is crucial to know the in’s and out’s of all the money that flows to you. And the TIMING of those financial transactions is what cashflow management is all about. You can win or lose when it comes to managing money, and it is cashflow that will determine the outcome.