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Why Is It Important To Create A Cash Flow and Net Worth Statement?

This article focuses on the cash flow and net worth statement as essential to the financial planning process, serving to both quantify and qualify one’s financial affairs. When updated annually, these documents can help set goals and be useful in tax planning and risk management. The cash flow statement shows inflows and outflows of cash receipts and disbursements over a time period. Subtracting total cash outflows from total cash receipts produces a number that shows the individual or household’s spending patterns. Cash flow statements also help project future income and spending patterns. The net worth statement is comprised of three components: assets, liabilities, and net worth. Net worth is determined by subtracting total liabilities from total assets; it helps indicate one’s level of financial freedom and flexibility.

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