cashflow

Chapter 2





Your Financial Statements

and Plans:

Cash Flow and Net Worth



Based on Personal Financial Planning by Gitman , Joehnk, and Billingsley, Cengage, 12e, 2011. Slides by Dorla Evans, FIN 100, The University of Alabama in

Huntsville.



1

Net Worth: A Measure of Wealth

 Solvent: Assets > Liabilities



 Uses of a net worth statement

 Keeping score

 Are you meeting your goals?









2

Income and Expense Statement



Cash flow statement



Shows where money comes from

and where it goes



Money coming in

- Money going out

= Net cash flows



3

Net Cash Flow and Net Worth

Net Worth

+ Net Cash Flow





- Net Cash Flow





Net Worth





4

Net Cash Flows

 Cash inflows  Cash outflows

 Wages/salary  Fixed expenses:

 Investment mortgage, rent,

income insurance, car

payment, & cable

 Variable expenses*:

food, clothing, &

entertainment



*Discretionary expenses

5

Cash Flow -- Joe College

Paycheck $2,500



Rent* $ 450

Utilities & cable* 200

Groceries 400

Entertainment 500

Car payment 250

Medical 0

Taxes 580

Clothing 55

Expenses $2,435



Net cash flow $ 65

Shares an apartment and splits rent, utilities, and cable costs

6

Change in Net Worth -- Joe College

 Total Assets $22,500 + $65 = $22,565



 Total Debt 13,125 + 0 = 13,125





 Net Worth $ 9,375 + $65 = $9,440



Or use $65 to reduce debt



7

Joe’s Cash Flow – Expenses Rise

Paycheck $2,500



Rent* $ 500

Utilities & cable* 200

Groceries 400

Entertainment 500

Car payment 250

Medical 0

Taxes 580

Clothing 125

Expenses $2,555



Net cash flow $ -55

Shares an apartment and splits rent, utilities, and cable costs

8

Change in Net Worth -- Joe College

 Total Assets $22,500 + 0 = $22,500



 Total Debt 13,125 + $55 = 13,180





 Net Worth $ 9,375 - $55 = $9,320



Or take $55 out of savings



9

Buying on Credit

 Lowers net worth; NOT an expense

MasterCard Statement



Previous balance $2,000

Payment received -300



Dillard’s 35 Clothing

Kroger’s 60 Groceries

Exxon 25 Gasoline

Interest 5 Interest

New balance $1,825



10

Financial Trends

Feb Mar Apr

Assets $25,000 $25,100 $25,200

Debts $10,000 $10,000 $10,000

Net Worth $15,000 $15,100 $15,200



Income $2,000 $2,000 $2,000

Expenses 1,900 1,900 1,900

Net Cash $100 $100 $100

Or reduce debt

11

Are you meeting your goals?

Net Worth retire





college $1.5M



$800K



buy house

children

$50K

$20K



Years

12

How We Spend Our Income

Food 13.5%

65%

Housing 33%



Transportation 18.6%



Apparel & services 4.7%



Health care 5.4%



Entertainment 4.9%



Personal insurance 1.1%



Pensions/Social Security 8.4%



Other 10.4%



13

How is Joe doing?

 Adequate Liquidity

 6 - 9 months living expenses in monetary assets

 Living expenses: remove taxes from Joe’s

expenses $2,555 - $580 = $1,970

 Monetary assets: $1,500

 Months: $1,970/$1,500 = 1.32 months









14

How is Joe doing?

 Savings Ratio

 10% of after-tax income

 After-tax income: Remove taxes from paycheck

for Joe $2,500 - $580 = $1,920

 Monthly savings: $65

 Ratio: $65/$1,920 = 3.4%









15

Not Making Progress?



 Track cash flows and create

statements



 Develop and implement

a cash budget









16

7 Reasons You Want a Budget

 Budget is a plan

 Budget is a gauge

 Budget gives you control

 Budget anticipates expenses

 Budget keeps you focused

 Budget eliminates squabbling

 Budget reduces stress



http://gailvazoxlade.com/blog/archives/3016

17

Cash Budget Example – Joe College

Item Budgeted

Amount

Take-home income $1,920

Rent $450

Groceries $400

Entertainment $500

Car payment $250

Utilities/cable $200

Savings $192

Misc. $55

Net cash flow -$127

18

How Much to Budget?









Historical expenses



Needs approach







19

Monthly Cash Budget

 Worksheet with textbook

 Gail Vaz-Oxlade’s worksheet

http://www.gailvazoxlade.com/resources/interactive_

budget_worksheet.html









20

Budget Control Example – Joe College

Item Budgeted Actual

Amount Amount

Take-home income $1,920 $1,920

Rent $450 $450

Groceries $400 $385

Entertainment $373 $420

Car payment $250 $250

Utilities $200 $180

Savings $192 192

Misc. $55 $100

Net cash flow $0 -$57

21

Budget Control Schedule

 Worksheet with textbook









22

Budget -- Stick with it! Be stubborn!

 Identify 6 things you

buy on a monthly

basis that you could

live without.

 How much would you

save per month?

 Per year?

 Through retirement?



23

Trouble with Your Cash Budget?

 Self control

 Adjust expenses to meet plan

 Try the envelope/jar system (Til Debt Do Us Part

http://www.money-saving-ideas.net/money-jar.html,

http://www.gailvazoxlade.com/articles/budgeting/magic_jars

.html )

 Increase income

 Budget may be unrealistic

 Plan too restrictive?

 Adjust the plan

24

Planning statements as tools



 Net worth



 Cash flows



 Budget







25

Questions?









26