For the case of an individual or a family, what are the most useful reports?
Common advice is that your emergency savings account should hold enough to
cover 6 months of expenses. In order to to do that, I need to know my
average monthly expenses. I guess I can use the Cash Flow report, look at
"Money Out" and divide that by how many months have gone by in the year. Is
there a better way to get average monthly expenses?
Stop ..... and this applies to a business as well as personal finances.
Cash flow IS important, but it is very different from overall financial
status. You need to be looking at BOTH, and being in financial good
shape requires that you need to be OK in BOTH senses.
To make this clear (in terms of personal finances) assume that your net
cash flow is positive but your net credit card liability is increasing,
and that increase in credit card liability is greater than the former.
On the other hand, you might be perfectly OK in terms of net worth
increasing but be subject to a cash flow crunch where at some point in
the period you don't have enough cash on hand to pay all expenses <<
Note -- this is more likely to apply to a business than to personal
finances in cases where you DO have a cash cushion in the bank of
several month's expenses >>
Now as to how to get a monthly average of expenses, the key thing is to
realize that you can throw away (ignore) part of a report. Thus an
"Income Statement" is always run for an interval between two dates. It
shows all income accounts and all expense accounts. You COULD go to the
trouble of excluding all those income accounts, but simpler to ignore
that part of the report and only look at expenses. For the average, just
divide by how many months the report covers. Or if you want to see how
varies over the year, run every month and enter that number in a
spreadsheet, etc. << the average for the year by itself is likely less
useful if seasonal variation is large >>
Michael D Novack
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