Budget Review and Sample Cash Flow Statement

Article by R. Joseph Ritter, Jr. CFP® EA

It is important to know how you are doing compared to your budget, and a good starting point is to track your expenses using an income and expense statement, also known as a cash flow statement.  To be useful, your cash flow statement will use the same categories as will be on your budget. The cash flow statement summarizes by category the income and, more importantly, the expenses that have actually occurred over a period of time. While you can do this by hand, it is much easier to use a software program such as Quicken or Money to simplify some of these steps and print reports.

The cash flow statement works together with the budget for the same time period to compare your actual spending against your budget.  This information is useful in determining whether spending in one or more categories requires adjustment. Notice I said adjustment to spending and not adjustment to budget. The goal is to spend no more than your budget allows, so if something needs to be adjusted, reduce your spending first. If you need to make an adjustment to the budget, wait until the next time you prepare a budget.

Let’s take a look at a sample cash flow statement, so you can get a better idea of how it works and what it looks like.

Interest$0.00$0.0 $0.00
Tax Rfd$0.00$1,864$1,864
Car Pmt$(1,200)$(3,800)$(2,600)
Bank Fees$0.00$(116)$(116)
Cash Out $0.00 $(229)$(229)
Sch. Loan$(1,608)$(1,859)$(251)
Mortgage $0.00 $(4,543)$(4,543)
Appliance $0.00$(20)$(20)
Baby Spls$(360)$(402)$(42)
Moving $0.00 $(1,745)$(1,745)
Home$(240) $0.00 $240
Life$(1,419)$(1,419) $0.00
Health $0.00 $(713)$(713)
Recreatn$(75) $0.00 $75
Storage $0.00 $(463)$(463)
Prpty Tax $0.00 $(311)$(311)
Tax Prep $0.00 $(64)$(64)
Cell Ph.$(1,020)$(411)$609
Water $0.00 $(167)$(167)

The first comment I have on this cash flow statement is that income exceeded expectations by $14,416. I have to applaud this person for being able to generate additional income. Compared to the budget in the previous article, he or she really needed this boost. His or her salary exceeded the budget by $5,621. This is great! It could be from a raise, bonus or second job. We really don’t know, but we do know that he or she got serious about correcting the budget issues. The one negative comment I have is that “cash in” could be described better. It would be helpful to know where $4,915 came from.

In the expenses category, two items should be noted in particular. This person moved, at a significant expense, and spent 10 times his or her budgeted amount on doctor bills. If you will recall in the sample budget, this person was already running a very tight budget. Incurring unanticipated expenses of $2,830 was not something he or she could afford, was it? This is an illustration of what can happen during the year and how easily and quickly trouble can come into your life. It also illustrates how quickly credit card bills can mount, especially if you don’t have a plan. The more likely explanation is that he or she already had some savings and wound up drawing on those savings to make the numbers work during the year.

You will also note that he or she saved slightly more than 10% of the total savings goal for the year. Scary proposition if you have an important goal, isn’t it? It’s not all negative, however. He or she ended the year with a surplus (net difference between actual income and actual expenses) of $5,621, which can go directly into savings. Still, he or she fell short of the goal.

You will notice that the difference between actual income and actual expenses is a positive number. In many of the categories, he or she understood that expenses had to be reduced across the board, and some were reduced. The grocery and gasoline budget may have been unrealistically low, explaining why the differences were significantly negative.

The key to using the cash flow statement is keeping track of income and expenses in as much detail as possible.  This system can be time consuming because it requires that you do some data entry beyond keeping your check book and balancing or reconciling your check register against bank statements.  It also requires that you be specific in assigning categories for your spending.

Computer software programs such as Quicken and Money can be used to keep track of expenses by category. They can handle multiple bank accounts and also have built-in report capabilities that make preparing cash flow statements and budgets simple at a few clicks of the mouse. Plus, the software allows you to analyze your budget to see how you are doing at any time during the year.

Although you can keep track of expenses on paper or in a spreadsheet, this method is much more time consuming than using computer software designed for this purpose. Our office uses Quicken and can easily help you get started or receive copies of your files to help you analyze the data.

In coaching clients toward reaching their financial goals, using a cash flow statement is a tool that we rely on heavily.  Beyond simply keeping track of your budget and monitoring your spending, the report can help us identify areas that may need extra attention, such as insurance and debt loads.

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