What is Financial Flow Diagramming?

Financial Flow Diagramming is the process of creating a graphical representation to answer the question, "Where does the money go?". Often pictures are much easier to understand than just lines in an Excel spreadsheet. These diagrams are often used to understand where the money is going within a company, and can be applied to one's own personal finances as well.

Typically, Financial Flow Diagramming starts with the income to a company or person. For most companies, income comes from sales of a product or service. Income for individuals usually comes from a salary from work, but can include other income such as bonuses, sales of personal items, and profits form investments.

Once the money comes into the hands of the company or individual, it is typically spent in different ways. For a company, the Financial Flow Diagramming shows that the money is used for a variety of business related activities, such as salaries for the employees, advertising, marketing, and overhead such as an office and office related expenses. For an individual, the money usually flows out just as fast (if not faster) to a long list of expenses that include necessities (such as rent, house mortgage, and food) as well as discretionary expenditures such as toys, clothes and cars.

Financial Flow Diagramming is a powerful tool because it allows us to visualize and understand the flow of the money using images. Often charts are used to show how a given source of income or an expenditure changes over time. Or, a pie chart can be created to show how much of the total expenses are devoted to a certain area, such as housing or cars. These graphics allow the reader to understand the information on another level.

For most people, the real value of Financial Flow Diagramming is that it allows them to understand how they spend their money. For example, most people are totally unaware, but their greatest expense over their entire life is taxes. If people understood that taxes are such a large expense, then they could take action to find ways to legally lower their tax expense. There are many ways of legally reducing our taxes, but 99% of people don't even think to look.

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