Last week we talked about budgeting basics, today's post is about cash flow planning. There is a key difference between the two: a budget projects your income and expenses over a period of time such as a month or a year, while a Cash Flow Plan looks more closely at the timing of cash flows and is useful to ensure your accounts are positive. This is not going to be an accounting lesson but we will talk about how to handle flows of cash in and out of your bank account.
Cash flow planing can help put your expenses in order. The rent is due on the 1st of the month, you go shopping every Saturday, get paid every second Thursday and you car payments come out on the 23rd. Maybe certain times of the year your cash flow is greater than others and your expenses peak during the holidays. Preparing for cash flows is important to help you make better day-to-day decisions which will enable you to make the most of your budget.
Good cash flow planning avoids the use of expensive credit. An emergency account should be established to deal with things that aren't in your budget such a major home repair, the sudden loss of income or a medical emergency -most of us don't have the cash flow to deal with these costs when they arise. A cash flow statement can be made to show your regular sources and uses of cash, ideally you want your cash flow to be positive unless you plan on reducing your savings or going into debt.
If you find yourself in a monthly deficit, consider lowering your living expenses. Start with expenses you can delay, reduce or eliminate such that subscription to a magazine you never read or imported luxury food items. If you find yourself really tight on cash, you may want to refinance your debt, work a second job, invest your parked funds in some revenue stream and/or look for tax efficiencies.
If you have a surplus of cash, it's time to focus on reaching your goals sooner and spending more money. Once you have an emergency fund, you can pay off your debt, save for retirement or pursue your dreams. You can add money to your vacation fund, start a business or retire early. Effective cash flow management is essential for your financial success, be it personal or business.
Thank you for reading and I hope you found this information useful, proper cash flow planning should help you meet your goals. We will go into more detail about managing money in later posts. Please feel free to leave and tips or ask questions.
