We hardly take time out to find out what our sources of income are and what are our expenses. Cash flow planning refers to our inflows (income) and outflows (expenses) of money as mentioned below.
Sources of income may include the following:
Outflows may include the following:
Cash flow planning is a regular exercise for companies but at an individual level we ignore the importance of the cash flow planning process. Companies need to have a positive cash flow for expansion, diversification, distribution of earnings etc. Similarly, at an individual level cash flow planning is required to identify the major income and expenditures in future (both short-term and long-term) and making planned investments so that the required amount is accumulated within the required time frame. Without having personal budget of income and expenditure, expenditure may exceed income and our investment plan and financial goals may go for a toss. Without proper cash flow planning one could easily get caught in the debt trap. Creating a plan is not enough. One also needs to implement the plan, besides bringing about a change in the spending habits.
Cash flow planning is the preliminary step and it lays foundation in the financial planning exercise. Cash flow planning is done prior to starting an investment exercise, because it gives projection of finances and what is it that you can invest without causing a strain on yourself. It also enables to understand if a particular investment matches with your flow requirement. Once the financial goals are set, the amount of investment required to realize the goal are set aside considering inflationary factor. Investment strategy can be worked out after cash flow planning and risk profiling.
Cash flow planning is power fool tool as it enables to: