CASH FLOW MANAGEMENT & BUDGETING
Chapter 3 - Profit and losses
In the previous sections you have seen how you can calculate your monthly and annual income and your monthly and annual expenditure. So, are you making a profit or a loss? This is now an easy calculation to make.
Start with the annual figures. Subtract your annual expenditure from your annual income. If the amount is positive, you’re making a ‘profit’ and have some money available for saving or additional spending/investing. If the amount is negative, you are making a ‘loss’ and you need to delve further into your budget. We will discuss this in a following section.
In the preceding tables, we calculated monthly income and annual expenditure. Obviously, each of these figures can be altered to allow for comparison. You can multiply monthly figures by 12 or divide yearly figures by 12. Here is an example (figures are rounded).
As with the spending and income calculations, you can calculate your ‘profit’ or ‘loss’ for both the 12 months that have just gone and the 12 months that are about to commence.
Planning your spending
Most people have a few large expenses which are only paid once or twice a year. This includes things like insurances, holidays, et cetera. In addition, sometimes income is not received on a regular monthly basis. Things like dividends or trust distributions might only be received once a year.
Because of this, it is unlikely that you will achieve the exact same profit or loss in each month over a 12-month period. Months in which large expenses fall may be ‘loss-making’ months. In these months, you need to use some of your ‘surpluses’ from previous months to pay the bills.
This is where having a single large calendar can be very useful. You can either buy one of these or, if you prefer, simply Google the words ‘single page 2018 calendar’ and you will be presented with many options that can be downloaded and printed off for free.
Use this calendar to identify when each of your large ‘bumpy’ payments will need to be made. Pay particular attention to months where more than one large payment is due – you will need to make sure you have sufficient cash resources available to meet these expenses.
What to do if your budget shows a surplus
Hopefully, your budget will show that your spending is less than your income. If this is the case, congratulations – you are making a profit and you should be saving money each month!
We are financial advisers. So you probably know what we are going to suggest next. This ‘excess money’ should be used to grow your net assets!
Net assets are calculated by subtracting all your debts from all your valuable assets. This means that there are two ways to grow your net assets. The first is to reduce your debt. The second is to acquire more assets. Doing either of these things will make you wealthier. You can look through some of our other e-books to learn more about each of these activities.
Alternatively, why not come and talk to us and we can show you the best use for this surplus money?
What to do if your budget shows a deficit
It may be that your budget shows your spending exceeds your income. You may already know this, in fact you probably already know this, but we need to say it for completeness:
if this continues, you will run out of money!
In fact, you may have run out already. So you need to do something. Fast.
Once again, there are two ways to respond. Many people apply some combination of these ways. Firstly, you can reduce your spending. This will be made much more achievable now that you have calculated with some precision exactly what you’re spending your money on. Of course, only you can judge those areas where you will be able to reduce your spending. That said, virtually everyone can cut back their spending and not notice any real change in their living standards.
Secondly, you can increase your income. There are various ways to do this, and once again we encourage you to book a time to meet with us so we can help you respond quickly and appropriately to your budget deficit.
But the important thing to remember? Don’t just do nothing!