Thursday, April 2, 2009

Importance of Cash Flow

Importance of cash flow

The basic fundamentals to the survival of all businesses is cash flow. Without cash, you can’t function; that’s a fact. Managing of cash flow is something very important for businesses. Cash within businesses can be compared with blood in animals. Blood is the source of life for animals like cash is the source of life for businesses.

Our lives is somewhat like businesses; you can’t function without cash. That means, we should treat our life like a business. Not only do we need to have our own financial statements, we also need to manage our cash flow. Of course, as with businesses, the higher our cash flow, the merrier! Cash is a basic fundamental for our survival in this era. A constant cash flow, especially passive ones, helps greatly in enhancing our survival in this world.

So… what does this tell us? We should all look to increase our cash flow, with the all too well-known active and passive income sources. Look into increasing your active income, and focus on investing prudently in long term income generating assets.

Increasing Active Income

For this part, I will take a leaf from Adam Khoo’s book.
In mathematical terms, Active income = Value * Time * Scalability,
Value = the amount you are paid per hour
Time = the amount of time you spend for that value
Scalability = the number of people you can reach out to for that amount of time you have spent.

Increasing Passive Income

There are many books and articles online about passive income. One simple way would be to dump everything into ETFs tracking indexes, and let it compound. It’s an especially good time to do so during a recession (like now). It’s a great way to increase your networth and assets. However, my focus is on increasing cash flow. Thus, I would suggest investing in dividend stocks, REITs, Trusts, etc. The growth of your cash might be slower than throwing into ETFs or investing prudently into great stocks with minimal dividends and compound your wealth like Warren Buffett, but the increase in cash flow will save you trouble at times on deciding whether to sell some of your wonderful assets when you need the cash. As a matter of fact, investing in Trusts or REITs at the right time can generate anywhere between 14% to 30% dividend yield!

Other forms of passive incomes include affliate marketing, blog monetizing, property rentals, etc, which I will not touch on in this article. But hope you get the drift.


In short, cash flow is important, and it would be great to focus on building, improving and increasing our cash flow. This is especially important and useful for young personnels and fresh grads like me.

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