Cash flow Planning and How it helps to Manage Your Finances

It could really get a bit overwhelming: cash flow statement, net worth statement, budget. Do I really need all of these to manage my finances, you ask? Before that temptation to disregard well-tested finance management tools sets in, let's clarify that you don't have to structure these financial tools at one time. Your budget is not done everyday, as you could have a budget designed for a year, though to be meaningful, you need periodic reviews. Your statement of net worth is also an occasional thing, depending on when you want to "weigh" yourself. A cash flow statement, whether actual or projected, is not a daily thing. So their preparation and use is staggered, though they share the same objective: helping you get to your best financial health. They only approach that solution from different but related angles. Note too that serious companies prepare and use these tools to run successfully. You are only adapting what companies and big business use for their efficient operations, when you use them for your personal financial planning and management.

What Cash Flow Is
There is always the need to distinguish between cash flow and earnings or income - they seem alike but aren't the same. Cash flow deals with actual cash movements: cash you receive (inflow) or pay out (outflow). While your income and what expenditure you incur may be the same over two months, your cash flow may be different: if, for instance, you owed for some of the expenditure in month-1 and paid all in month-2, your cash flow could be seriously strained in month-2, when it wasn't in month-1. Managing cash flow is related to, but different from budgeting your spending. Cashflow planning aims at ensuring that expenditure you have budgeted on your income is structured and timed in such a way to ensure that you conveniently fund them. It equally seeks to manage income timings, where possible, to have them come in at the best possible time.

In all, cashflow planning will optimise the use of your cash resources, ensuring you not only do the things you have planned for, but are able to avoid a liquidity crises on the one hand and excess cash holding that can result in misuse or loss, on the other. If someone, irrespective of income level, is often in distress borrowing or unfunded credit purchases, it will be a strong sign of poor cash flow planning. Not able to save? Check your cash flow management. Can't square up on family needs? It's a cash flow problem. Planning your cash flow is so critical that if you miss it, you could end up in all kinds of financial crises. If you plan your cash flow properly, you are unlikely to run into many funding problems, irrespective of your income level. A cash flow mismanagement, on the other hand, is bound to leave you financially disoriented.

What it Says
A cash flow statement is a spreadsheet that relates your cash inflows and outflows, showing your net position. In effect, it shows money you actually received in a period, how you used it and what was left, if any. That way, you can judge for yourself, how well you have done. When prepared as a forward-planning tool (projected cash flow), it helps you decide ahead what inflows that you expect and how you will apply them. Combined with your budget, you not only ensure that you decide carefully what you want to spend money on, you also decide the best timing. While you may budget to take a holiday which your income can accommodate, your cash flow plan will determine your best timing for that expenditure. You may consequently buy your ticket two months ahead, because that's when you can best fund it. Without a plan, you possibly spend your 'excess' money in that month, only to find that you can't pay for your ticket in the month you want to travel.

Personal Cash Flow Sample Format
A typical personal cash flow statement will have the following structure:

That's the format and what specific items go into it will depend on your sources of cash inflow and what you are spending on. Use this statement to plan ahead, particularly. You cash flow projection will help you manage your finances, stay in control of spending and optimise investment. The projected net cash flow, for a given period, could be initially negative or positive. But that's part of the objective: to identify such mismatches. When there is an excess, what do you do? Increasing savings and investment is one good option. Spending more is of course a choice. Shortfalls too will need a decision. For instance, to reduce expenditure in other to eliminate the imbalance. Or go borrowing to bridge the funding gap. What is best in all that is that you make deliberate choices and control how your finances are deployed.

So, learn to use a cash flow statement to direct the use of your resources and time how money is spent. That's one way to achieve great results that your contemporary, who just spends without planning, is never going to come near to. The basic principles of life seem quite clear: you get work you work for, mostly.

Premium Investment Education, Always

	Page Tools
	Send article to friend(s)
	Format for printing
	Comment on the article