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How do I Create Positive Cash Flow?

Article Details
  • Written By: Jessica Ellis
  • Edited By: Bronwyn Harris
  • Last Modified Date: 13 December 2017
  • Copyright Protected:
    2003-2017
    Conjecture Corporation
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Positive cash flow refers to the amount of an income that remains when all expenditures are considered. If a person makes $1500 US Dollars (USD) per month and spends $1495 USD per month, he or she has a positive cash flow of $5 USD per month. On the other hand, if a person with the same income spends $1550 USD per month, he or she has a negative cash flow of $50 USD. Creating positive cash flow is the primary means of saving, paying off debt, and achieving financial goals.

Whether an individual, small business, or giant corporation, the first step to creating more positive cash flow is often to eliminate unnecessary expenditures. For an individual, this may mean cutting out extras such as gym memberships, cable TV, and new cars. For a business, this may mean reducing some employee services, such as bonuses, parties, or extraneous positions. By reducing expenses, the difference between a negative and positive cash flow may be significantly lowered.

Another major tactic to creating positive cash flow is to start comparison shopping for lower-priced necessity. With the Internet, anything from clothing to office supplies can be searched in an instant, providing a whole range of pricing options to suit different budgets. While it's important not to skimp on products that ensure safety or health, buying less expensive toner and printer paper or shopping at a discount store is unlikely to change a lifestyle significantly. Maximizing expenditures to get the most for the money is a great way of creating positive cash flow.

For individuals and businesses, careful management of investments is critical to the amount of positive cash flow. If a person owns property, stocks, or other investments, optimizing the earning power of these accounts can create higher income, and thus a better chance of a positive cash flow. In some cases, this may require an initial expenditure; fixing up a property so that it can be rented out, for instance. When planning to spend money to make money, it is important to understand the true earning potential of an investment before diving in with additional funds. Spending to improve something beyond the bounds of its earning potential will result in a wasted effort, and the loss of sometimes much-needed capital.

Just as managing investments is important to positive cash flow, so is managing debts. High interest rates can quickly turn debts into black holes that drain away any potential positive earnings. Organize debt payments so that debts with the highest interest rates receive the most attention, since higher interest rates usually mean that the total repayment will be much higher if the payment period drags on for decades. Try employing the “snowball” principle: each time a debt is paid off, take the payment that was being made and apply that to the next largest debt. By following this method, financial experts suggest that years can be taken off the life of any type of debt, from mortgages to credit cards.

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