There are copious amounts of great material on Investopedia, a most useful resource on the world of finance. I thought it would be useful to begin this piece with a reminder of what a trusted definition of cash flow is:-

 

INVESTOPEDIA EXPLAINS 'Cash Flow'

In business as in personal finance, cash flows are essential to solvency. They can be presented as a record of something that has happened in the past, such as the sale of a particular product, or forecasted into the future, representing what a business or a person expects to take in and to spend. Cash flow is crucial to an entity's survival. Having ample cash on hand will ensure that creditors, employees and others can be paid on time. If a business or person does not have enough cash to support its operations, it is said to be insolvent, and a likely candidate for bankruptcy should the insolvency continue.

 

Most of us have some form of spreadsheet in operation around the household finances, which demonstrates that most of us see some benefit in the habit. Why plan your cash flow? What are the main benefits of cash flow planning?

These are the obvious questions, but why don’t business and individuals engrain this habit more in their business and private financial plans?

Cash flow planning and forecasting is key to lowering financial stress. The main reasons for doing so differ in detail between business and the individual; however the fundamental principles remain the same. I will concentrate here on private individuals’ financial planning needs. It is a very good habit to practice and the positive results are invaluable. Let’s take a look at some of the good reasons for cash flow planning:

  1. Provides detailed projection on where the money is coming from, useful if you have more than one source of income
  2. Provides details of where the money goes. Once analyzed, it becomes clear what is core/essential and what is lifestyle/discretionary – ‘nice to haves’
  3. Provides a good insight into what is affordable for regular savings and retirement planning
  4. Provides an easy way to compare your real cash flow with your forecast
  5. Removes the element of uncertainty and guesswork. Here using the cash flow, you can see the effect of a decision on expenditure before you commit
  6. Demonstrates the peaks and troughs of your cash flow during a financial cycle/year
  7. Highlights potential funding gaps/problem areas in expenditure and can help prioritize and plan timing of larger expenditure items like back to school expenditure, holidays, motor tax & insurance renewals, general insurances, pension contributions, changing car, home extension
  8. Identifies exactly how much of a sinking fund is required to have in place to meet larger expenditure items or how much of a loan is required for the new car or home extension for example and how your affordability stands up for loan repayments
  9. Enables creation of what if scenarios, and really empowers you to make the right decisions about the house hold finances for now and the future
  10. Can improve relationships in the home! Need I say more!

Once you drill down into your household finances, measuring and controlling becomes infinitely easier.  There is a business philosophy which says ‘what you measure improves’. In business this normally applies to cutting out inefficiencies, bad practice and waste reduction. In households today, this same philosophy can be hugely beneficial and it is pleasantly surprising how naturally it becomes to reduce both core and discretionary expenditure. Yes even the core expenditure can be cut.

Once this exercise is done for a full year, the real benefit is from tracking the actual expenditure for a 12 month period against forecast, and this provides evidence of the real peaks and troughs of household budgeting and cash flow planning. No matter where you are in the life-stages, this tool will help you achieve those age related financial planning milestones.

To help you get started, I provide this free download which hopefully will provide some assistance in your own financial planning methods. Click here.