The consumer mindset and the business are opposite of each other. For the business the main goal is to be able to generate profit for shareholders. However consumers have been taught that their main function is to consume. Purchase products and services in order to utilize them. While there is nothing wrong with consumption, too much consumption is dangerous and can leave one financially devastated. There are many business principles that one can use in order to secure their finances. One of which is cash flow. We can take the business principals to better our financial situation.
A business uses an income statement and a balance sheet in order to account for the activities and the decisions of management. One of the most important elements of a business is the cash flow generated by management decisions. The three forms of cash flow that a business uses are cash flow from operating activities, cash flow from investing and cash flow from financing activities.
Cash Flow from Operations
As an employee one goes to work, earns income and purchases goods and services. The goods and services that many employees/consumers purchase don’t have any particular value outside of the purchase. In many cases the item or service purchased loses its value immediately after consumption. As a result the purchase was overpriced and lost value without getting any type of financial return from the purchase. In many cases the return is solely based on the use of the product or service such as a car or television. Therefore consumer/employees do not generate any cash flow from their purchases.
A business receives cash from a loan or investors. A business in turn uses the cash received from investors or loans to purchase inventory. They purchase the inventory at a lower price then they sell to customers. Unlike an employee that uses its cash to consume, a business uses its cash in a way to get more cash. Hence one of the ways a business generates cash is from regular operations.
We can learn from business by decreasing our consumption and using our cash to sale products and services. Like a business we can use our extra cash in order to purchase inventory and sale a product. We can take a cue from business and also generate cash from our own business operation, instead of just wasting money.
Cash Flow from Investing Activities
For many people the primary way of investing is using a company sponsored 401 k plan or 403 b plan. Although retirement plans can be a good way to invest many people don’t really invest at all. What many people do is gamble. They have no idea what is in their 401 k plan the objectives, risk, and fees. In the basic concept of equity investing is to buy low and sell high. However those who do not actively manage their money often ride highs and lows until they retire. Riding highs and lows is not a viable investing strategy.
Businesses on the other hand receive a third form of cash from the sale of investments, property and equipment. Businesses buy assets and at times sale those assets to perspective buyers. As a result businesses generate cash flow by investing. The employee/consumer focuses only on mutual funds or his or her IRA or retirement plan. However there are many different types of assets one can invest in. Just like business we can use our funds to purchase assets in the form of bonds, property, art, gold, etc. Instead of trusting only in an employer’s 401 k plan one can create a separate portfolio that can provide one with a second source of income. As you gain extra income from selling a product or service you can invest some of those funds into viable assets thereby creating your second stream of income.
Cash flow From Financing Activities
The third source or cash for a business is cash from financing activities. As mentioned earlier a business receives its funding from investors or from the bank. Cash from financing activities represent the cash received from the sale of debt or equity securities subtracted by the cash it took to retire the equity or debt. Although it will be different to apply this principle to our lives, we can still take the spirit of the meaning in our personal finances.
Many consumers finance their lifestyle through debt. They get loans for their home, car and school. The true value of one’s wealth is one’s net worth. How much you own verse home much you owe. In the case of consumer/employees, one will generate more wealth by decreasing one’s debt burden. The more you own the wealthier you will be. Hence paying off debts should be part of any consumer’s financial planning. By paying off debt one becomes richer and will have more cash in order to invest. Hence debt reduction also has cash flow implications, by reducing your debt burden you will be able to have more funds available.
In summary, a business makes money from three sources. While the average employee makes money only from one source. Consumers who desire to build wealth can learn a thing or two from business. Those desiring to build wealth must have multiple ways to receive money. The three ways businesses receive cash is from operations, investing and from financing activities. It is advisable that we follow what businesses do and generate income from at least three sources.
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