Cash flow is your fourth wealth-building block

Jeanpo Olowo. PHOTO/FILE

What you need to know:

  • Cash flow helps you plan for your future better and it gives you better investment opportunities.

Cash flow is king in our financial freedom journey. Cash flow is defined as monies coming in and going out of your personal or business accounts in a given period.

It is the net amount of cash and cash equivalents transferred into and out of your business or pocket. It’s also defined as money that is moving (flowing) in and out of your pocket or business. 
A positive cash flow means your business or pockets have more cash coming in than you are spending.

A negative cash flow means there is more cash going out than coming in.
Cash flow is your fourth wealth-building block. It could be from your income, sales, profits, new investment, and debt payments. The real-time measurement of your personal and business financial health is cash flow.

Cash flow is a very important block in building wealth because it enables you to achieve your financial obligation and goals. 

Cash flow is liquid and stable. With a positive cash flow you can pay off your expense and have a safe landing during crises and emergencies. 

Cash flow helps you plan for your future better and it gives you better investment opportunities. The main secret to financial freedom is finding, increasing, and multiplying your cashflow. 
Many of us tend to equate wealth with only how much we have accumulated in investments or assets and forget the importance of having cash flow and how critical it is in our financial freedom. 

You may be rich with a lot of assets accumulated but are suffering from cash flow poverty. When building your cash flow, you need to consider the following; the money you earn or make needs to be quickly invested into income-producing opportunities or cash flow generating opportunities. 

You need to make sure they are not in one income stream but spread out, so that if one dries up the other can give you cash flow. Consider your risk tolerance in cash flow-generating income streams. 
Issues to consider when increasing your cash-flow, include maximising your earned income, creating a source of income portfolio with your job, consulting or running a business or businesses, private equity investing, and creating a source of passive income like earning interest on your savings.

Invest in stocks or funds that have a dividend payout, royalties – get paid for your videos, books, artworks, photos, etc., patents, invest in Real Estate Investment Trusts (REITs), rental properties, rent out parts of your house, lend money via social lending network, peer-to-peer lending, mutual funds etc, optimise your tax efficiency, especially in your business and be deliberate on financial literacy and investment education. 

It’s important you understand your cash flow pattern. Are you living for now? This is when money flows in as salary income and flows out to pay for your expenses, none of it is saved or invested. 

This cash flow pattern may support living an enjoyable lifestyle now but won’t lead to an increase in your wealth. 

In the wealth creation pattern, money flows in as salary and flows out to pay expenses and invest in ‘cash flow creating’ assets. The key difference between these two patterns is that the flow of money from these assets is an additional cash flow or income. 

While many people focus on living for now which is short-term, to achieve financial freedom and all the lifestyle benefit that comes with it for you and your business, you will need to invest in assets that grow and create a positive cash flow called cash flow creating assets.

Jeanpo Olowo (PhD) is a consultant, financial & business operations. [email protected]