Cash Flow Management

One of the basic underline for effective financial planning is Cash Flow Management. It is the building block of your overall financial plan. How best you control your income & expenditure determines your capability of generating surplus income for managing your financial goals.Cash Flow Management addresses two basic concerns of your life-

• Arranging necessary funds to fund your plan
• Ensuring cash available is utilized effectively to meet your financial goals.

There are different stages of life cycle and the strategy for managing your finances varies as you move ahead. In the initial years of career, the focus is more towards savings and investing for your future. This should increase with increase of your income. However, that’s not the case. Many a times the more an individual earns through his/her working life the more is the expense. Sometimes high income earners have very little capacity to accumulate surplus income because their expenses are too high. In current scenario, one of the primary reasons for such situations is higher liabilities an individual accumulate with increase in income. Sometimes this leads to a situation where capability to save even for day to day expenses reduces.

So what cash flow management strategy one should follow? It’s is a very difficult question to answer as financial situation is unique for everyone. However, there are certain areas which need to be planned ahead so that the whole objective of cash flow planning and budgeting is not defeated.

Emergency Fund Planning: There are various kinds of situation which lead to plan for creating an emergency Fund. Unexpected Medical Emergencies, Home Repairs, Overshooting budgets during marriages, Natural Disasters, Sudden demise of the primary member are some of the reason why you should be planning for the fund. This fund can be kept in money manager account of MFs, Fixed Deposit, Cash in savings A/c or sometimes in asset classes like gold where it can be readily converted into cash

Debt Management: One of the fundamental aspects of personal finance in today’s scenario is debt financing. What amount to be borrowed should be derived from what % of your income you can utilize for repaying your debt? Although every individual has a different debt tolerance level, ideally not more than 30-40% of your income should go into debt management. An over leveraged situation reduces your capability to save and becomes a roadblock in achieving your financial goals. Thus, in order to have a high cash flow your debt management needs to be very effective.

Liquidity: It’s  very necessary that some of the assets should be highly liquid so that if need arises, they can be converted into cash. This helps in smooth running of day to day life, provides better bargaining power in your hands and above all gives you a mental peace and satisfaction.

Monitoring of Budget: A budget does not end when it is created. Proper monitoring is required as there will be variances due to change in income or expenditure. Such variance need to be evaluated & specific measures should be taken to address the changes.

Forecasting: The correct assessment of income & expenditure and changes therein is an important factor in planning for the future. For this all goals and other aspirations needs to be quantified.