Any business owner or executive would tell you that cash flow is key. It allows them to pay off debt and gives them a tremendous amount of flexibility. When I worked for a small M&A firm before grad school they used the phrase "cash is king" and did a lot of short hand valuations based on cash flow. The phrase described the ability of an acquiring company to immediately pay down debt and other short term obligations by using the excess cash over immediate liabilities.Why is this at all important you might ask? Because the same principles apply to you. If you have any sort of budget you likely have a good idea of what your cash flow looks like, but keeping track of this indicator lets you know if you are in the red or black each month and if you should be allocating more money to investments or if you need to tighten up in other areas.
First step, figure out how much you bring in each month by tallying income, investments, pensions, social security and any other income streams you may have. Next, figure out for a month what you spend on everything from groceries and gas to health club dues and child care. Once you have a list of these items you can grab a legal pad & pencil, fire up Excel, or head over to YahooFinance where they have a handy calculator that will let you fill in the blanks.
Links
Yahoo! Cash Flow Calculator
Yahoo Finance