Aryan is a 12-year-old boy who runs a small lemonade stand in his colony. Every day Aryan makes a profit of ₹200 from the sale of lemonade. He also incurs expenses of ₹150 on buying lemons, sugar, and cups. At the closing of his radar, Aryan is left with ₹50. That ₹50 is referred to as his “cash flow”.
Let’s say one day Aryan only makes a profit of ₹150 but still spends all of it, that is ₹150. At the end of the day, he has no money left in his pockets. This shows that Aryan does not have any cash flow that is positive, in which he could invest and grow his business. This story tells us why it is very crucial to understand the sources of funds and the applications of funds. Small businesses, such as a lemonade stand, or big businesses have cash flow, which helps in knowing if a person has sufficient money to pay the day-to-day needs.
What Are Cash Flow Statements?
A cash flow statement is like Aryan’s notebook, in which he writes:
- Money Coming In: The earning from lemonade sales is ₹200.
- Money Going Out: The expenditure on lemons and sugar is worth ₹150.
- Money Left Over: The savings at the end of the day amount to ₹50.
For larger corporations, cash flow statements depict the income value earned, the outgoing cash expenditure, and the amount that remains as savings profit.
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Positives and negatives of cash flow
- Positive Cash Flow: When you earn more than you spend. For example, Aryan earns₹200 and spends₹150, which leaves him with₹50.
- Negative Cash Flow: When you spend more than you earn. For instance, when Aryan earns₹150 and spends₹200, he is thus in the deficit of₹50.
What happens when they face liquidity issues?
At times, individuals or companies may go overboard with their expenditure. For Example:
A household may earn rents worth ₹10,000 but spend ₹12,000 on repairs and loans.
Therefore, they have a negative cash flow of ₹2,000 in that particular month (₹10,000 – ₹12,000 = -₹2,000).
To redeem this, they can consider repaying previous loans with new ones. This means combining all loans into one loan with a lower interest rate. This reduces the amount that they have to pay each month, improving their cash flow.
How Does Debt Consolidation Work?
Debt consolidation is the process of merging different loans into one single loan with a lowered interest rate. This decreases the number of repayments and their general value on a monthly basis, thus making it easier to service such debts. Here’s an example to understand it better:
Rohit has three loans:
- Loan 1: monthly payment of ₹3,000
- Loan 2: monthly payment of ₹2000
- Loan 3: monthly payment of ₹5,000
This means that the total payments are equal to ₹10,000 divided by month.
Rohit uses debt consolidation, whereby instead of making three loans, he makes one. Now he pays only $6,000 per month instead of $10,000. This saves him $4,000 every month, thus bettering his cash flow.
What Makes Cash Flow So Significant?
For Families: Helps them in being geared with cash for such eventualities, like the way Aryan keeps cash for purchasing better lemonade glasses.
For Businesses: Ensures there is money at hand to be used in paying salaries, purchasing materials, or widening the zone of business.
For Loans: Some help achieve better loan management for persons, like debt consolidation.
Conclusion:
Cash flow is the same as knowing how to budget for the coins that you store in a piggy bank. It is also important in Aryans lemonade stands as well as in a multinational corporation; knowing what comes in and what goes out is essential. It aids in saving, strategizing, and even expansion. Begin the process by keeping tabs on your allowances and any expenditures you make. Who knows? Perhaps you may just be the next Aryan with their own thriving venture.