These two concepts are often misunderstood and invariably we find people tend to focus on “good budgeting” as the key secret to wealth generation.  Unfortunately this isn’t quite right and the subtle difference can mean a world of difference over a lifetime.

So what’s more important?

It’s not so much an issue of importance, but more one of focus. Over the years we’ve had the opportunity to study and observe intimately the financial habits, focus and nuances of hundreds of highly (financially) successful people.  Whilst there are many differences between the methods or strategies behind their varied successes, we have found overwhelmingly there is one consistent theme.  All successful people have a thorough understanding and diligent focus on Cashflow as one of, if not the primary driver of success.

This holds true for individuals, businesses and organizations of all sizes even in different parts of the world.

That’s not to say that these people don’t also have a strong focus on budgeting also, invariable they do, however the important difference is the different use of the two concepts and the focus on each.

We have found that budgeting is primarily used not as a method of driving profit (ie obsessive focus on reducing costs), but as method allocating resources to the most productive areas.  This is where the adage “you have to spend money to make money” comes from.  We find for example, many highly successful individuals or business actually pay their accountants significantly higher amounts, both actually and relatively, than the moderately successful.

The principal difference isn’t the amount of the expense, but the value that spend generates, ie how much it can increase future cashflows.  If more spend means increasing future Cashflow (eg a good management accountant or sales consultant), you can’t spend too much. If not (eg compliance accountant just doing tax returns) then the expense should be kept to a minimum or removed.

A focus on Cashflow however tends to provide a better long-term result as cash is the lifeblood of wealth creation.  The more of it you have, naturally the easier it is to generate more Cashflow.  Without adequate Cashflow, debt tends to increase (to cover shortfalls) which simply means less future productive Cashflow as more is need to service debt. If left unabated this spiral eventually leads to disaster, just ask Greece!

Therefore “It’s all about Cashflow” as a focus for making decisions if you want to generate more wealth.  Budgeting is important, but really only as a method of directing expenditure to more efficient future Cashflow generation.

So by all means have a budget and try to stick to it, but without a proper cashflow plan, don’t expect to get much better any time soon.

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