CAP Tool 21. Understanding Cash Flow

Objective: To help people think about their cash income sources and choices regarding spending and saving.

Method 1: A Cash Flow Tree

Draw a tree and explain that just as water is drawn into the roots, up the tree and along the different branches, so money comes into a household and has to be channelled towards a variety of expenditures. Ask them to label the roots with their different sources of cash income and label the branches with different types of expenditure.

Example:

Other possible sources of cash, which do not appear in this example might include:

wages or a pension
rent income
receiving gifts, loans or remittances from relatives
selling assets

Other uses for cash might include:

paying rent or tax
saving
repaying loans or lending money
giving gifts

Discussion topics:

• The competing demands on money and how there are always choices to be made.

• The problems of prioritising expenditure. You can ask people to put the most important items on the lower branches and those of less importance on the higher branches. This generally leads to much debate and differences of opinion. Women will have different views from men and older people may differ from younger ones. It can be interesting to get different members of the household to make separate versions.

• Are cash incomes combined in the household - in which case who decides what money should be used for? This is important when people have different opinions about what it is important to spend money on. You need good gender awareness to handle this topic.

• Can one type of cash income be singled out for one type of cash spending? The answer should generally be no as income flows are diverted to whatever need is most pressing on any particular day. This is why it is silly to imagine that loan repayments will be made from one particular income source and this partly explains why people fail to make loan repayments.

• The relative importance of each source of cash income could be assessed by asking the people involved to allocate different numbers of beans or seeds to the different sources. You could then count the beans and ask the people involved in the discussion to allocate this number of beans to the different expenditures.

• Where is money kept when it is not required immediately? This information is useful for initiating discussions about where and how people save money and the problems that they see in this, e.g., of safety and accessibility.

• If someone wants to start a new enterprise, how would they work out if they had enough money to do this?

Method 2: A Cash Flow Story

Make up a story about a family’s income and expenditure pattern and get people to fill in a simple cash flow chart while you are telling it. It is essential that a very simple example is used. Ensure the example enables discussion to take place about savings and different spending decisions. The example below comes from Zambia.

Mulenga and Mary live in Nchelenge district. Mary earns some income from selling cassava, while Mulenga is a fisherman. They have a few chickens and two goats. They have three children attending school. They would like to buy new furniture for the house this year, which will cost K600 and they are wondering if they can afford it and when they should make the purchase.

· Mulenga’s expects the following income from selling fish:

K500 in March, April, October and November
K400 in May and September
K300 in June
K100 in July and
K200 in August.

· Mary usually gets money from cassava in the following months:

K120 in January
K100 in February, August and September
K200 in June.

· They often sell some livestock in the rainy season and may get:

K200 in January
K100 in December

· Every month they need K20,000 to cover their living expenses.
· They need money for school expenses in the following months:

K150 in April
K200 in August and
K400 in December.

· Mulenga needs money for boat and net maintenance:

K100 in March
K150 in May and July
K300 in November.

Now let us work out the monthly balance throughout the year by subtracting the expenses from the income each month. Sometimes this will be positive, sometimes it will be negative if income is less than expenses. It might be zero if income exactly equals expenses.

If Mulenga and Mary save their surplus money each month, when can they afford to buy the furniture? You must work out how their savings grow on the bottom line. If the next month has a positive balance, add it to the savings; if it has a negative balance, subtract it.

If they buy the furniture in June, they will not have enough to cover the next month’s expenses. If they wait until September, they will manage but have very little in reserve. October is best. Discuss the importance of keeping some money for unplanned expenses or emergencies.

CASH FLOW CHART
for Mulenga and Mary