Role of Cash Flow Projection and Planning in Financial Resilience
Cash flow planning and projection are critical for all individuals as it helps anticipate cash shortages, take corrective actions, and prevent situations where you may find yourself having a fund shortage. In this blog, we discuss the role of cash flow in ensuring your financial wellbeing.
What is cash flow?
Cash is an indispensable part of personal financial planning. But a lot of people don’t realise its importance. Also, most people have various misconceptions about cash flow planning. Cash flow planning is not just about preparing a budget and following it, but it is also about understanding your everyday/monthly spending patterns, identifying the areas of improvement, setting financial goals, and being ready for uncertain times.
If we break it down further, you can consider cash flow as –
- Money received – the total income earned from different sources, including the interest/dividends received from your investments, FDs, etc
- Money spent – this includes the money you spend on things such as house rent, groceries, utility bills, children's school fees, etc.
Without a positive cash flow, i.e., the money received is more than the money spent, you are sure to face financial trouble. Therefore, it is paramount that you have a clear understanding of how much money is coming in and going out to make sure you don’t spend more than you earn.
What is cash flow projection?
Cash flow projection, aka cash flow forecasting, helps individuals assess their financial condition, manage their debts, and make appropriate financial decisions for the future. Based on the size of your family, your lifestyle, and the needs of your loved ones, you can make a cash flow plan for different periods, like daily, weekly, monthly, quarterly, or annually. In simple terms, cash flow projection tells if you have enough to ensure that all your family’s needs are met or if you need additional funds.
Importance of cash flow projection
- Expect a shortage of funds in the future
One of the biggest benefits of having a robust cash flow estimate is that it helps you be in a better position to know the potential cash flow shortage situation and be prepared. Thus, it helps you prevent facing a shortage of funds or financial emergency as you can detect the problem early and take necessary measures to mitigate the issue.
For example, you can apply for a personal loan beforehand, postpone the major investments or even liquidate certain assets on time to maintain sufficient cash flow.
- Plan your investments more efficiently
While making your cash flow plan, if you see that you can expect high returns in the near future, you can plan your investments in a better way. You can explore different investment avenues that would augment your financial growth and help. You build a sizeable corpus for your future goals. You can also make important decisions on whether you can invest in the surplus fund or if you need to build a cash reserve.
For example, if you expect a high amount of cash coming in the next few months, you can invest the surplus funds in different investment schemes to suit your goals, or you can buy an additional insurance policy for your family to get an additional layer of protection for your family.
Thus, cash flow projection helps you invest better and make smart financial decisions that benefit you and your family.
- Be ready with an alternative plan
Cash flow planning and projection help you to be ready with a robust plan during exigencies. You can run through different potential emergencies you may face, and based on the cash flow projection, you can take necessary measures. At the same time, you can have a plan B in place well in advance if any such scenarios occur.
- Have better control over your spends
By reviewing the monthly expenses carefully on the cash flow plan chart, you can easily identify the things where your family is spending the maximum amount. This can prompt you to find different ways to reduce expenses and focus more on savings.
For example, if you notice that you are spending the maximum amount of dining out at premium restaurants, you can consider reducing the dinner outing to once a month to reduce the expenses or consider eating out at local restaurants, which would cost you much less.
- Manage the debts better
Apart from helping you identify roadblocks in the cash flow and showing a clear picture of the areas where you are spending the most, cash flow estimates also help you manage the debts more efficiently.
For example, if you notice that your unpaid credit bill is accruing more interest every month, you can focus on repaying the entire amount and settling the dues once and for all rather than paying high interest every month.
Thus, cash flow projection is critical for all. It helps you manage your expenses and maintain your financial well-being. The more precise your approach, the better will be your cash flow projection.