Assets are things that have value. They can be physical like houses, cash, shares,, and stocks. They can also be immaterial, intellectual property, skills, or information.
Cashflow is the net balance of cash moving in and out (of a business) at any given time. It simply means having sufficient cash on hand to meet your day-to-day personal and business needs. Positive cash flow is when your available cash meets or exceeds your needs, while negative cash flow happens when your needs exceed the cash available.
Profit is the difference between the amount earned and the amount spent. Profit occurs when your expenses are less than your income. This means after all your costs, your financial situation is improving.
Here’s the trick
In many cases, people focus so much on one of these key legs while ignoring the other. Having a negative in any of the three above erodes financial wealth. A great way to build financial wealth is to always watch out to ensure that all three items are positive.
For instance, a person or business with a lot of may have twenty houses. They are asset-rich. But if those houses are not yielding any money, the person is cashflow poor. That person will always struggle financially.
On the other hand, another person runs a business where they buy and sell foodstuff. Every bag the person sells, they make a profit, and they keep growing. The person is so busy running the business and saving money and forgets to buy assets like houses or lands. The person is rich in cashflow and possibly profits, but poor in assets. This person is not wealthy. Why? If the economy crashes or the currency is devalued, the person could suddenly find themselves unable to afford things.
If the person’s business shuts down and they can’t make new money for a long time, they will erode all the previous money they had with nothing to support.
Another example is of companies that are very rich in cash flow. For instance, a shop can be making lots of sales every day. money is coming in and out, but at the end of the year, there is no profit. That company needs to borrow more and more each year from the banks to survive. Its bank accounts may show huge sum of money flowing through, but it is a company that is poor in profits.
The idea, place to be is to ensure that all three legs are balanced- Assets, cashflow and profits
