Household Cash Flow: What Comes In, What Goes Out, What Is Left

A household cash flow is a dated record of what arrived, what left and what was left over, written out month by month rather than added into one figure. A cash flow is not a plan, and it is not a list of what the household holds. Kept monthly, it is the only view that can show a household running short in five months of a year it finished ahead in.

Here is what sits underneath that answer. The bank statements have been recording it the whole time, so every household already has a cash flow whether or not anybody has ever written one out. Writing it out does one thing: it stops the months being added together. A year is a single figure. Twelve months are twelve figures with a date against each, and twelve figures can say something one figure has no way of saying. Adding the months together hides all of it.

The shape of the year that follows is a familiar one, and it is worth naming before the arithmetic starts. The Bhosale household, invented, finished its year Rs 22,560/- ahead and was short in five of its twelve months. A year finished ahead with short months inside it is an ordinary combination. A steady salary looks exactly like that when school fees, two insurance premiums and a festival refuse to arrive in equal monthly instalments, and every one of the five short months has a dated item sitting behind it that can be pointed to on a calendar. A short month is not carelessness, and what should have been done about one is the household's own affair.

Sorting any statement line into one of three sections, building a month out of them, saying why the month's own figure and the account's closing balance disagree, and reading twelve months without adding them up: that is what keeping a household cash flow comes to.

What is a household cash flow, and how is it different from a plan?

Picture two sheets of paper on the same kitchen shelf. The first was written on the first of the month and says what the household intends to do: rent, the instalment, groceries, something put by. The second was printed by the bank at the end of the month and says what happened, line by line, each line carrying a date. A household cash flowA dated record of what came in, what went out and what was left over, kept for a stretch of time such as a month or a year. is built out of the second sheet. A cash flow is a record of what did happen, not a statement of what was meant to.

A cash flow is dated, backward looking and not open to argument: it reports the month the household actually had, and a month that has been lived cannot be negotiated. A plan carries no such constraint, and that is the whole difference. A plan can be optimistic and still be a decent plan. A cash flow that is optimistic is simply wrong, and it is wrong in the direction that hurts. A household reading a flattering record of its own past will lean on that record the next time a difficult month arrives.

A household cash flow is also not a list of what the household has. A cash flow covers a stretch of time and records movement: what came in during April, what went out during April. A list of what a household holds and owes is taken on a single date, the way a photograph is taken, and records a position instead. Neither can be worked out from the other.

How Money Flows Through a Household: what can money do once it arrives?

Money enters the Bhosale household at two points and no others. Meghna Bhosale's take-home pay of Rs 39,800/- is credited to the salary account on the 1st of each month. Ashok Bhosale's tailoring counter has no account of its own, so whatever the counter took that month is carried across into the same salary account in one transfer at the end of it: Rs 7,200/- in April, Rs 19,600/- in November, Rs 1,600/- in March. Everything the Bhosale household does with money starts in that one account.

Once a rupee is sitting there, it can do exactly four things, and the list is worth holding on to because every statement line that ever needs sorting is one of the four. A rupee can be spent. Spending means it leaves the household altogether: Rs 14,000/- of rent on the 5th. A rupee can be moved. Moving means it goes to another account belonging to the same household and never leaves: Rs 2,000/- into the recurring deposit on the 15th. A rupee can repay what is owed: Rs 3,150/- of the two-wheeler instalment on the 7th leaves the household the way spending does, and also reduces something the household is carrying. Or a rupee can stay where it is. Staying is what the Rs 4,030/- still sitting in the account on 30 April did.

There is no fifth thing money can do, and that is what makes the list useful: a statement line that looks like a fifth thing is almost always two lines that arrived on the same day. A single card payment covering groceries and a school book is two lines. A transfer that pays a bill and leaves the change in another account is two lines. Split it, and each half goes somewhere.

Which three sections does a household cash flow have?

Money in. Money out. Movements between the household's own accounts. Most households that write this out build it with two sections, and the missing third is where the sheet stops being true.

Money inEverything that arrived from outside the household: pay, takings, a refund, a gift. Money handed over by one of the household's own accounts to another is not money in. is everything that arrived from outside the Bhosale household: Meghna Bhosale's pay of Rs 4,77,600/- across the year and the counter takings of Rs 96,000/-, together Rs 5,73,600/-. Money outEverything that left the household altogether, whether it was spent on something or paid to somebody the household owes. is everything that left the household altogether, and for the year it came to Rs 5,51,040/-, made up of Rs 2,32,800/- of amounts that are the same every month, Rs 2,22,240/- of amounts that come every month at a different size, and Rs 96,000/- of items that turn up once or twice a year and are not on anybody's monthly list.

The third section holds the movementsMoney going from one account of the household to another. It has not arrived and it has not left; it has only changed seats.. Rs 2,000/- went into the recurring deposit on the 15th of every month, Rs 24,000/- for the year. Rs 4,000/- came back from the buffer savings account in April and Rs 6,000/- in September, and Rs 8,000/- went the other way in November, so Rs 2,000/- net came out of the buffer and into the salary account. Not one rupee of those movements arrived from outside the household or left it, so not one rupee of them belongs in the first two sections.

The last two rows are the check that the record is built correctly. The salary account opened the year at Rs 6,200/-. Adding what the year left, Rs 22,560/-, taking away the Rs 24,000/- that went to the deposit and adding back the Rs 2,000/- that came from the buffer gives Rs 6,760/-. The salary account actually held Rs 6,760/- on 31 March. Interest of Rs 1,180/- was credited to the buffer savings account across the year and never touched the salary account. The interest therefore sits outside these twelve months rather than inside them.

Why is money carried into a deposit neither money in nor money out?

Because nothing has arrived and nothing has left. A recurring depositAn arrangement with a bank where the same amount is paid in every month for a fixed run of months. The money is still the household's; it has changed accounts. holds the household's own money in a different place with a different name on the passbook. Rs 2,000/- that was in the salary account on the 14th is in the deposit on the 15th, and the household is neither richer nor poorer for the trip. Treat it as spending and the record starts lying in a very specific direction.

The sizes are what make the point, so work both mistakes with the Bhosale household's own figures. Put the Rs 24,000/- of deposit payments into money out for the year, and the year that left Rs 22,560/- now reads as Rs 1,440/- short. The household would be looking at a record saying it spent Rs 1,440/- more than it received, in a year when every rupee of the difference is still sitting in its own deposit. Counting a movement as spending is the commonest error on a household record, and it always runs the same way, making a household look poorer than it is.

The opposite mistake runs the other way and is just as easy. In April the household carried Rs 4,000/- across from the buffer savings account because the salary account was thin. Count that as money in and April reads as Rs 51,000/- in against Rs 51,170/- out, a shortfall of Rs 170/- instead of the Rs 4,170/- that actually happened. A month that was short by four thousand rupees now looks like a month that very nearly balanced. A short month is precisely the month a household most needs to see clearly.

Separately, and only as a matter of arithmetic, the deposit takes Rs 24,000/- across a year in which the household's own record left Rs 22,560/-. The gap of Rs 1,440/- came out of the buffer savings account. Nobody sat down and decided that. Putting the two figures beside each other is what produces the gap, and producing it is the entire reason the third section exists.

How is one built from the statements a household already has?

One month at a time, and always from the statement rather than from memory. Memory keeps the rent and forgets the school fee. The household opens the month, takes every line on it in order, and gives each line one of the three sections. Adding the money in column, adding the money out column and taking the second from the first produces the month's netMoney in less money out for a single month. It is what the month itself did, and it ignores anything that only moved between the household's own accounts.. List the movements separately, underneath, where they cannot get into either total.

Two things make this harder than it sounds. The first is that a household usually has more than one account, and the Bhosale household has three. Build the record for the household rather than for an account: a payment from any of the three is money out, and a transfer between any two of them is a movement. The second is the line nobody can identify, the eleven hundred rupees on the 19th that nobody remembers. An unidentified line is written down as unidentified rather than pushed into whichever section makes the month look tidier. A record with one honest gap in it is usable, and a record with one made-up line in it is not.

Here is April built that way, from the Bhosale household's own statement. Notice that the three parts of money out are kept apart. A month is short for a reason, and the reason is usually in the third part.

How is a single month read, and why is the closing balance not the net?

A month has two figures and they disagree on purpose. April's net was minus Rs 4,170/-: more left the Bhosale household than arrived in it. April's closing balanceWhat an account held at the end of the month. It carries whatever was already there at the start, and it moves when money is shifted between the household's own accounts. on the salary account was Rs 4,030/-, a comfortable looking positive number. Both are correct, and a household that reads only the second one will believe April went well.

The gap is made of three things and they are all visible above. April opened with Rs 6,200/- already in the account, and the month did not earn it. Rs 4,000/- was carried in from the buffer savings account on the 17th, and the month did not earn that either. Rs 2,000/- went out to the deposit, and the month did not spend it. Starting at Rs 6,200/-, taking away the Rs 4,170/- the month was short, adding back the Rs 4,000/- and taking away the Rs 2,000/- arrives at Rs 4,030/-.

The net answers what this month did, and the closing balance answers what is in the account after everything the household did to it, including moving its own money around. Between the 24th and the 29th of that April the salary account was actually below zero. The closing balance on the 30th shows none of that either. A balance is a photograph taken on one date, and it says nothing about the twenty nine other dates in the month.

What does a whole year look like when nobody adds it up?

The Bhosale household's twelve months follow, each one built the way April was built. The last column is the one to read first, read down rather than added up.

Twelve months, and the twelve figures run from minus Rs 4,170/- in April to plus Rs 14,030/- in November. Five of them are below zero. One of them, November, is bigger on its own than the whole year's Rs 22,560/-. A single month covered the year and then some. The shape of the Bhosale household's year is a line that dips five times and is rescued once, and no yearly figure in existence can carry that shape.

What does a negative month actually mean?

A negative monthA month in which more money left the household than arrived in it. It says what the month did and nothing at all about the household that lived through it. means one thing and one thing only: in that month, more left than arrived. A negative month is a fact about a calendar. A negative month is not a verdict, it is not a character note, and on its own it is not even a warning. The same household can have five of them and finish the year ahead, and the Bhosale household did exactly that.

Look at where the Bhosale household's five short months fall and the pattern is almost boring. April carried the first school term of Rs 9,600/- and school clothes of Rs 3,200/-. July carried the life cover premium of Rs 9,600/-. August carried the second school term of Rs 9,600/-. September carried the health cover premium of Rs 14,400/-, the largest single item in the year. December carried the third school term of Rs 9,600/- and Rs 3,600/- of travel. Every one of the five short months has a dated item behind it, and none of the five was caused by the household spending more on ordinary living. Groceries in September were Rs 11,400/- against an average of Rs 11,200/-, and money in that month was Rs 48,600/-, above the average month rather than below it.

The useful reading is worth stating precisely. A negative month shows when things fall due. A negative month does not show that a household is overspending, and it cannot. A premium that arrives once a year in a single lump has to land in some month, and it will make that month short whatever anybody does. The question a short month raises is a question about the calendar.

Why does a run of three short months read differently from three scattered ones?

Because of what sits between them. April was short by Rs 4,170/- and May put Rs 9,330/- back, so whatever April used up, May replaced within four weeks. A runTwo or more short months falling one after another, with no positive month in between to put anything back. takes that repair away. July, August and September were short by Rs 2,670/-, Rs 1,070/- and Rs 3,670/-, a total of Rs 7,410/- across three months with nothing positive in between them.

Three scattered short months are three separate events, and three consecutive short months are one event lasting a quarter of a year. The difference shows in what the Bhosale household actually did: on 12 September it carried Rs 6,000/- across from the buffer savings account. The September transfer was the second of the year, the first having been the Rs 4,000/- in April, and it arrived in the third month of the run rather than the first. A run does not announce itself at the start. A run announces itself when the buffer that has been covering it starts to run low.

Why is the yearly figure the least informative number on the sheet?

Because a total is a sum, and a sum has no sequence inside it. The twelve monthly figures added in any order still come to plus Rs 22,560/-. April first or April last, the answer does not move. Ignoring order is what addition is for, and it is exactly why the total cannot say when anything happened. The single figure of Rs 22,560/- is not wrong about the Bhosale household's year; it is silent about it, and silence is easy to mistake for reassurance.

Who else reads twelve months instead of one total?

Anybody who has to decide whether a payment will be made on a date. A lender considering an application therefore asks for several months of bank statements rather than a yearly figure: months carry the pattern and a total cannot. The same applies to whoever is deciding on a tenancy, and to a household member trying to work out whether an instalment falling on the 7th is comfortable or tight.

A reader of twelve months looks for the worst month, the run, and what covered them, rather than the total. For the Bhosale household the worst month was April at minus Rs 4,170/-, the run was July to September at minus Rs 7,410/-, and what covered both was a buffer savings account that gave up Rs 4,000/- in April and Rs 6,000/- in September. The Rs 37,920/- of committed outgoingsThe amounts that leave every month whether or not anything else happens: rent, the instalment, maintenance, connections, groceries, travel, and the rest of ordinary living. that leave every month, whatever else is happening, is the figure that makes a short month uncomfortable rather than merely negative.

A lender, landlord or office decides for itself what to do with what it reads, governed by its published terms. The reason the request is normally for months is plainer: a request for a year is a request for a figure, and a request for months is a request for a shape.

What can a household cash flow not show?

A cash flow cannot show what a household is worth. A record of twelve months carries movement across a period and holds nothing at all about the position on any single date: not the Rs 84,000/- sitting in a long-standing account, not the gold in the cupboard, not the Rs 29,400/- still owed on the two-wheeler. Holdings and debts belong on a different sheet, taken on one date rather than across a year.

A cash flow also cannot say whether a month was good. Minus Rs 970/- in December is a fact and not a judgement, and a household reading it as a judgement has asked the record for something it does not contain. And every figure on it has already happened, so it cannot say what will happen next. A cash flow is a record and not a forecast, and the moment it is read as a prediction it stops being the one document in the house that cannot be argued with.

The Bhosale household, Meghna Bhosale, Ashok Bhosale, Ira Bhosale and Sahyadri Freight Services Private Limited are invented.
Educational material. Not advice on any investment, tax, budget or market position.