What is Cash Flow? Is it Really King?

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I always hear about how cash flow is king so I decided to dedicate this post to analyze whether cash flow is indeed “king”.

What is Cash Flow?

When defining the fiscal strength of an individual, the most important financial aspect to consider is the cash flow.  Cash flow is the movement of money within any given account, of course, a positive cash flow is king.  Factors consistently replenish and deplete funds within that account, these include expenses like rent, debt payments etc. and positive factors, like income, rental income, dividend income etc.  This movement of funds is typically observed for a set period of time and then this is used to determine whether one has positive cash flow or not.  This figure is then represented in a statement of cash flow and can be used to determine the specific factors of an account that are performing well and those that require improvement or adjusting.  It sort of works like a budget, but not really.

Types of Cash Flow

cash flow Pictures, Images and Photos

There are three primary types of cash flow that are analyzed for the cash flow statement.  Each will apply to both businesses and individuals in different ways.  The first is operational cash flow.  Operational cash flow, as the name implies, results from the money generated by typical operations.  This means the production of a good or service for a company or the income generated from a job or side hustlin' projects for individuals.

The money spent and received on investments is the second type of cash flow. There are many different types of cash flow investments.  RRSP's, stocks and bonds are common sources of investment cash flow for individuals.  My utmost favourite is the DIVIDEND.  Dividend income is favourably taxed in Canada, so this cash flow means that the tax man won't get it.  Usually, investments will only result in a positive cash flow after an a long time investing money into the dividends…. a loooong time.  For example, if you have $1000 invested in dividend stocks and you get 5% return annually, that's $50 a year.  If you continue increasing your investment and shares in that dividend stock, you will continue to accrue dividend income (as long as the company keeps paying it to you of course).  My dream (and no doubt many others share this dream as well) is to be able to live off dividend income (or other sorts of passive income) one day.  One day!

Financing for individuals means borrowing money from a bank or business in exchange for repaying the original amount along with any added interest.  Negative cash flow occurs here and yes, it sucks.

Obviously a positive cash flow is the ideal outcome.  This means that incoming funds exceed outgoing costs.  Rental income is an example of a positive cash flow.  Positive cash flow with rental income will only result after all expenses have been covered.  Consistent passive positive cash flow is a sign of financial success and stability (to me anyway) because it is not dependent on you working to generate this (e.g. you could be sipping a pina colada somewhere in Jamaica and still generate income).

A negative cash flow, as the name suggests, is when the expenses of an account exceed its income.  This isn't so good but is really quite common.

How does Someone Generate a Positive Cash Flow?

It takes time and effort to generate a positive cash flow, but the payoff is pretty sweet.  Rental income is a common method for achieving a positive cash flow (hopefully this will be generated for me soon!).  Dividend income is a great one but it takes time and discipline to NOT sell your dividend stocks for its capital gain (or I suppose in the recent case, loss).  Adsense is another good one (if you have a blog, but you do have to write the content in the first place!)  There are many different ways to do this and it takes a bit of creativity but is well worth the effort.  However, sometimes you want to make sure your cash flow isn't so high that you're taxed to the nines come tax time.  There are many ways to reduce your income and taxes, especially if you have rental income or other small business income.  In addition, I think it's super important to make sure you have different SOURCES of cash flow.  So that if one screws up, you still have the other to rely on.

So I think I answered my own rhetorical question.  Cash flow is indeed king!

Readers, any other sources of cash flow?  Which one is the cash flow source you are most intrigued with (e.g. rental income, dividend income etc.?)

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Young is a writer and former owner of Young and Thrifty and the main "twitter' behind Young and Thrifty's twitter account. She lives in Vancouver, BC and enjoys long walks on the beach, spending time with her anxious dog, and finding good deals. If you like what you read, consider signing up for email updates.

12 Comments

  1. Liquid Independence on November 14, 2011 at 9:39 am

    What a coincidence, I also want to live off my dividends some day. Informative post, miss. Mr. Kiyosaki would be proud. Hope you find a tenant soon so you can increase your cash flow.



  2. retirebyforty on November 14, 2011 at 11:19 am

    I believe cash flow is king! Even if I owe a ton of mortgage debt, as long as I have positive cash flow from the rentals, I’m still doing OK. It’s better to have debt, but I’m willing to take on some debt if that means better cash flow – or even future cash flow.



  3. Etienne on November 14, 2011 at 12:09 pm

    relying on cash flow only is VERY dagerious.

    A lot of people only look at cashflow, they put their car on leases or 7 years payment plans, they buy TV with 48 payments, they take their mortgages on max amortization period and smallest cashdown.

    All this leads to better cashflow (lower monthly payments), but MUCH higher total cost.

    cost and cashflow are often negatively correlated. Your $150k cheap lake cottage that is “just” 800$ per month will end up costing you $400k at the end… do you really want to spend $400k on a lake cottage?

    IMO a lot of people rely too much on monthly costs without looking at the actual total cost of goods.



  4. young on November 14, 2011 at 2:03 pm

    @Liquid Independence- Thanks! I think I may be “sealing the deal” with a tenant very soon so hopefully the cash flow will start flowing!



  5. young on November 14, 2011 at 2:04 pm

    @retirebyforty- My dad actually continues to renew a bit of his mortgage debt (and the banks love him for this) even though he can pay off his properties so that he can have deductions on his rental income. I think you mean “its better NOT to have debt” 😉

    My goals are to increase rental income, dividend income, and blog income! AND only work part time. That would be my dream situation 🙂



  6. young on November 14, 2011 at 2:07 pm

    @Etienne- Good point to clarify- Buying a TV with 48 payments is NOT a good idea, especially since people are likely paying interest on that. I think something that can give you a return (like rental real estate mortgage debt) would be ideal. I think that cash flow needs to be CONTROLLED— people need to think of it as using that money to reinvest, and NOT spend it for fun. For example, people get a return on their RRSP refund, and instead of “treating” ourselves, we should be using that to put into the RRSP or put into the TFSA. It’s all about what we use with that “extra” money.



  7. Miss T @ Prairie EcoThrifter on November 14, 2011 at 3:19 pm

    We have been working hard this last year to increase our positive cash flow amount. It has been improving slowly but it is a work in progress. We find reviewing our spending and our budget regularly helps with making sure it keeps going up.



  8. krantcents on November 14, 2011 at 7:30 pm

    I used to have income property cash flow and I am looking forward to dividend income cash flow. Who knows a a thriving business (blog) could be in my future



  9. Personal Budget on November 15, 2011 at 7:58 am

    Damian from Quicken Canada here. Many of my friends have been trying to figure out how to establish passive income and then leave their full-time jobs. I know a few people that do quite well with Affiliate marketing. It takes time to get going, but if you have a site with great traffic, it can generate quite a lot of positive income. Fingers crossed I can do this myself!



  10. Simple Rich Living on November 15, 2011 at 4:00 pm

    Great post! Your goals are exactly my goals…rental income, dividend income, blog income and work part time! I have have working income at the moment (and probably for the next few years). In the next 2 years, by latest something in 2013, I hope to save enough to buy a house with a rental suite. I haven’t actually started to invest in stocks yet but plan to (once I save enough for a house down payment) and blog income hopefully by 2013. Will take 2012 to build the blog.



  11. young on November 17, 2011 at 11:14 pm

    @SRL- Sounds like a great plan!



  12. young on November 17, 2011 at 11:14 pm

    @krantcents- Yes it could! Because you are an entrepreneur!



  13. Investing: Growth versus Monthly Income on October 27, 2013 at 8:30 pm

    […] investing, I have always deliberated between opting for growth and opting for monthly income (e.g. cash flow is king).



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