In business, cash flow plans are used to manage the inflows and outflows of cash. In financial planning and forecasting, a cash flow plan allows organizations to keep track of revenues, allocate budgets properly, and plan for changes in revenues and expenses.
Learning about a cash flow plan can benefit anyone interested in the finance industry. In this guide, we define cash flow plans, explain what's included in one, describe the benefits of cash flow-based financial planning, and provide a few tips to consider.
What is Cash Flow Planning?
Cash flow plans predict how much cash is coming in and going out of an organization each month. A written cash flow plan helps companies determine how much incoming cash they need to cover their expenses. Having built a robust cash flow plan, companies can manage cash, budgets, and other key financial aspects of their businesses.
Keeping track of income and cash flow is an important aspect of many business operations. A cash flow plan can facilitate this process. Furthermore, companies can plan for future cash needs using this tool.
Despite their specific purposes, insurance professionals also use cash flow plans. These plans help agents determine how much insurance packages can cost their clients. Even though this is a useful tool, a general cash flow plan is more applicable to all types of businesses or organizations.
How Do Cash Flow Plans Work?
When creating a cash flow plan, a variety of factors must be considered. There are various ways for an organization to earn cash and bills, payments, or expenses. Cash flow plans should detail an organization's incoming and outgoing cash. A cash flow plan should include the following items:
Operating activities: A company's operating cash flow includes any incoming cash it receives from selling products. Purchases of merchandise, raw materials, and employee wages are examples of activities that involve outgoing cash.
Investing activities: Investing activities are also part of a cash flow plan. In a cash flow plan, long-term investments are considered investing activities, as are property purchases and the purchase of new equipment.
Financing activities: Another type of activity to include in a cash flow plan is financing. In this part of the cash flow plan, you can categorize your organization's financial decisions like long-term loan payments and stock sales.
Benefits of Using Cash Flow Based Financial Planning
Cash flow planning can be beneficial for a variety of businesses and organizations. In addition to using tools like a cash flow plan to streamline financial planning, each plan will differ based on the organization's income, expenses, and needs.
Cash flow plans have the following benefits for a business:
Prepare for Fluctuation
You can anticipate future payments or fluctuations in cash flow if you develop your cash flow plan several months in advance. In certain months, such as December, your company might expect higher profits when selling holiday cards.
Taking into account fluctuations in income and expenses can help an organization make smarter decisions. Even if cash flow changes throughout the year, key stakeholders who understand the forecast may have more confidence in the company.
Pay Bills on Time
Companies can use a cash flow plan to prepare for business expenses and income changes. Certain software tools, for example, may require annual subscriptions. Instead of paying for the subscription monthly, the company pays once a year.
Budgeting for such an expense could be difficult for a company. On the other hand, the cash flow plan can document the exact month when the subscription needs to be paid. It is possible for the company to maintain positive relationships with other companies and clients if it anticipates upcoming expenses.
Notice Cash Flow Trends
The ability to notice trends in a company's financial picture is another benefit of implementing a cash flow plan. Let's say the company routinely sells goods year-round. In March, however, the profit increased over the past two years. If salespeople observe this trend, they can identify what caused the company's profits to increase.
During other months of the year, this can improve sales quality and potentially boost profits. Regularly tracking a company's cash flow helps business analysts or financial advisors notice trends that may otherwise go undetected.
Allocate a Cash Surplus
Any cash surplus can be allocated appropriately and thoughtfully when a company uses a written cash flow plan. Companies that identify surplus cash can use it to invest in new opportunities, increase their marketing budget, or provide bonuses to all employees.
Using the surplus could ensure that the company does not need it at a later date, should the company decide to use it. Making informed decisions about how to use cash allows business leaders to make better decisions.
Tips for Creating a Cash Flow Plan
Saving, in theory, is one thing, but creating an actionable plan is quite another. Here are six quick tips to help you start new habits.
1. Set ambitious but realistic goals
Visualizing where you would like to be financially is important before building better cash flow. Creating a financial goal is a great way to do this. Your goals shouldn't be limited by what you think is possible. You should set 'stretch goals' - targets that will demand continuous improvement in your performance, but they are not impossible to achieve - and put a deadline on them to monitor your progress. There are several factors to consider when setting goals, including age, health, financial commitments, short-term obligations, and debts and assets.
2. Pay yourself first
One of the most challenging aspects of cash flow management is the discipline to pay yourself a set amount for your daily living expenses. You can set up a central cash hub to automatically pay your bills and transfer your living expenses into a transactional account. During this time, you have worked hard to earn your salary, and it is now working for you as interest is earned on it.
3. Review the flow of your money
Being business-minded is helpful. As well as looking at how much they own versus how much they owe, they measure the money coming in and out. They can decide what to invest, borrow, cut costs, and spend by assessing this information. This relationship is critical to understand.
The link between what you earn (income) and what you spend (expenses), as well as what you own (assets) and what you owe (liabilities), explains the importance of building assets that generate income and reducing liabilities that create expenses.
4. Consider your costs versus income
You can also determine your cash flow status by looking at your expenses and income. Knowing how much you spend versus what you have coming in will give you a better idea of what you can save. Minimizing your costs should be the goal.
Having an understanding of what percentage of your income goes toward paying expenses can positively affect your ability to save money, reduce debt and build positive cash flow. By analyzing where your expenditures are higher than you thought, you may identify key areas where your spending is out of line.
5. Start budgeting
A budget or cash flow plan is the first step to achieving your financial goals. Keeping track of your expenses is crucial for creating a budget that considers your entire financial situation. You can get started by speaking with your financial advisor or accountant. Having a written budget allows you to see how certain expenses, such as entertainment, fall under certain categories. You can reprioritize your spending by visualizing how much of your money goes to these categories.
6. Get advice
It can be difficult to know where to turn for assistance in reaching and maintaining your financial goals, but a variety of financial services professionals can help. Choose a financial services professional who you think can provide the specific advice you need after understanding their role.
By now, you should be prepared to create your own successful cash flow-based financial plan. Financial planning requires a lot of hard work, but if you're disciplined and persistent, you can achieve anything.
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