“I work freelance and my income comes in at different times over the month. I’ve done my budget and it shows that my income is more than enough to meet all my expenses. I really try not to spend money carelessly. However, every month I’m always short of funds to meet my obligations, and I end up having to borrow from my family to tide me over. I don’t know what I’m doing wrong. Help!”

At a recent business seminar, I had the privilege of listening to a wealthy Texan businessman, Keith Cunningham reveal some of his secrets of success. Cunningham was one of the ‘rich dad’ mentors of Robert Kiyosaki, bestselling author of Rich Dad, Poor Dad. In his presentation he highlighted the importance of reading and understanding financial statements.

Cunningham pointed out that most people go straight to the profit figure on an income statement, to decide if a business is performing well, but neglect to focus on the cash flow statement. This ‘rich dad’ declared that while the profit and loss statement could be called a theory, cash flow was the reality.

“Profits do not sustain a business, for it can live for years without a profit,” he said, “but it will fail if there is no cash.”

I thought that this concept of cash flow in a business was also relevant to our personal financial lives. In deciding how well we are managing our money, we usually focus on the budget. The budget could be compared with a company’s profit and loss statement, as they both show what is left after the income is used to pay for the expenses. What is left behind is our surplus or shortfall, our personal net profit or net loss.

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Could it be that just like a business, we also need to focus our attention on our cash flow?

My client’s concern was that her budget showed profit, but her reality was that she was broke all the time. I decided to look at her cash flow to determine when she was paying out cash as against when she received it.

I created a simple cash flow calculator, which tracked the daily cash activity in her life. We used the categories recorded in her budget and itemized the spending into daily figures. We also recorded her income on the dates she received it. Then the calculator worked out how much cash she had on hand every day.

The results of the calculator revealed the extent of the problem. Most of my client’s large expenses were due at the end of the month. Because she did not receive her income all at one time, she was short on cash immediately after paying these bills and she had to borrow from family.

This situation seemed never ending because as soon as she got more income, she had to use it to pay off the people she had borrowed from and then she would be broke again.

Now that we had identified the problem, what was the solution to get her finances on a smoother track? The first thing we were able to do is to reschedule the due dates when some of her expenses. By making her payments more in line with when she received her income, she reduced the need to borrow to survive.

Simple things like buying groceries every week instead of once per month also made a difference. We also looked at ways to get extra income in during the periods where she still was going to be short on cash flow.

Another benefit of the cash flow statement was that she could use it to predict exactly how her cash situation would be on any day of the month. Armed with this information, she could make appropriate spending decisions that allowed her to stop feeling cash-deprived most of the time.

If your income varies every month, or if you receive commission along with, or instead of a fixed salary, or if your income is received periodically over the month, it might be good idea for you to keep track of your daily cash flow. As we have seen, it’s more than just your budget surplus that determines how well you are managing your money.

Copyright © 2007 Cherryl Hanson Simpson. No reproduction without written consent.

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Originally published in The Daily Observer, March 22, 2007

Cherryl is a financial columnist, consultant and coach. See more of her work at www.financiallyfreenetwork.com and www.financiallysmartonline.com. Contact Cherryl