Cash Flow Planning Isn’t Just for Businesses

Cash flow planning is a critical piece of keeping a business running smoothly in the short term and ensuring that long-term business goals can be met. The fundamental principles apply to individual investors too. Thinking about your financial plan isn’t just about investing. Understanding how you spend money can clarify your goals and motivate you to re-direct money into places that mean more long term. It’s a simple process once you get going, but first, you need to understand the goals and apply the principles to your personal financial journey.

What Cash Flow Planning Isn’t

Don’t confuse it with budgeting. Because part of cash flow planning tracks expenses, it can feel similar. The difference is that you are looking at both the short-term and the long-term with cash flow planning, and you are using it to make decisions that will shape the future. Budgeting is sometimes looked at as scarcity-planning. Businesses use it to keep spending in check, and it works the same way for individuals. You prioritize and cut things. Budgeting is a tool for your financial plan.

Think Big Picture

Cash flow planning is about goals. It starts with a clear picture of your current finances – budgeted expenses included – but then goes a step beyond to help you see what changes you can make that will dovetail with your financial plan and help you get to your desired results. All of these are included in a cash flow plan, where only current expenses are included in a budget.

When you identify future income, expenses and significant expenditures along with existing annual expenses, you can coordinate with your financial plan and make changes to investment planning. If you don’t know what and when your flows are, your investments can get off track, which can cost you money across return opportunities, taxes, and more.

How it Works

Cash flow is a simple calculation of your income minus your expenses.

Begin by looking at your monthly net income after taxes. Include all sources: salary, child support, alimony, social security, rental income, reliable investment income such as dividends or interest payments.

Then look at your expenses. These usually fall into five different categories:
• Debt payments – leases, loans, credit cards
• Taxes – income, investment, real estate, etc.
• Basic and discretionary monthly expenses – everything from groceries and gas to golf and gifts
• Savings and insurance transactions – how much you save and all your insurance payments
• Irregular expenses throughout the year – take a look at the last three years and average these

Basic math comes next. Subtract expenses from income and that’s your cash flow.

Now, identify your goals. These are the spending you need to accomplish your life goals over the next 5-10 years. They could be education, second home, home improvements, etc.

The planning part is how you get from your cash flow to your future needs. It may be a combination of cutting expenses, refinancing debt, increasing savings, or rethinking your asset allocation.

Cash Flow Planning Goals by Lifestage

For early accumulators, cash flow planning often centers on getting the basics in place. These are saving, spending, creating an emergency fund and getting solid start on a retirement plan. Looking to the future is often about homeownership and starting a family.

Mid-career accumulators have different objectives. They often have more income, and expenses can be more complex. With more income comes more spending, so ensuring it’s going to the right long-term goals is critical. Paying for college, maximizing retirement savings, focusing on after-tax investing are all important in this stage.

Pre-retirees and retirees aren’t off the hook just because they aren’t accumulating anymore. It’s even more important to use cash flow planning to guide investments in the de-accumulation phase because you don’t a regular flow of income to smooth over mistakes. Getting off track on budgeting, failing to plan for major expenses, or having the wrong investment plan can have serious consequences.

The Takeaway

Cash flow planning is an important part of your overall financial plan. It sounds painstaking, but like everything else, there’s great technology that can ease the process. Combining good tech with sound advice can keep you cash flow positive and on track for years to come.

Max Morgan, AIF, Partner