Importance of Understanding Your Cash Flow Statement

cash flow statement

Understanding your cash flow statement speaks a lot about your current financial state. It allows the proper accountability as to where your assets are, how you are earning income or money, the needed expenses, and the things that still need to be paid.

There are many reasons as to why it’s crucial to start understanding your cash flow statements to ensure financial freedom and stability – especially during your senior years. By understanding your cash flow, you get to learn the projected expenses and income that you need to have in order to enjoy a comfortable retired life.

Balancing the Figures

A balanced financial statement shows that all your assets and cash are properly accounted for. It keeps track of where your money goes, as well your debts, if you have any. Likewise, balancing the figures is the key to figure out whether there’s enough cash or income to cover all expenses, or if assets are building up.
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Income and Expenses

Income, or revenue, is the money that you receive from any source. Typically, this is your salary, or other sources of income, such as rentals. Expenses, on the other hand, are the costs that you pay for. This typically includes mortgage fees, living expenses, food, electricity, gas, and many others.

Income is easy for the working class, because they have their salaries to cover their expenses. However, problems arise whenever the expenses overtake income. This results to a negative cash flow and could easily disrupt your financial condition.

Retirees who typically plan ahead fight negative cash flows by setting up retirement funds or other pension plans. Through these funds, they ‘save’ a part of their money while they work in preparation for their retirement life. In essence, it allows them to receive income to fund their expenses later on in their lives.

Retirement funds are there to help you maintain a comfortable lifestyle. Understanding your cash flow would generally give you an idea as to how much you approximately need in order to have a comfortable life later on during your retirement age.

Assets and Liabilities

Another good point to understand with your financial statement is your assets and liabilities. Assets are your properties, which includes real and personal property, as well as your cash. Liabilities, however, are debts and obligations that you have to pay.

A financial statement that has its liabilities exceeding its assets spells trouble. Understanding your statement would help you plan ahead of time, especially if you have still a number of obligations that need to be fulfilled. This gives you and overview as to how to properly fulfill and pay for your debts. Likewise, by knowing that you have more assets than your liabilities, you would know that you have a better financial condition in the future – even when retirement comes.

Balancing your assets and liabilities, as well as your revenue and expenses, can do wonders for your financial stability in the future. However, if you are still having a hard time understanding how financial statements and retirement funds can help you get a comfortable retirement life in the future, it is always best to consult experts to ensure that you make the best decision for you and your family’s financial security.
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  • Simon @ Modest Money

    A clear understanding of one’s financial records is key in developing strategies to improve on one’s financial situation. Its only when we are accountable, when we know where our money is or which direction our investments are going that we can get proactive about them thereby succeeding.
    As its said, what gets measured gets improved!

    • Donny Gamble

      I just only wish that I was taught this kind of stuff earlier in my life.

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