The Importance of Cash Flow Management in Financial Planning

Cash flow is the money that comes in the door every week, every month, or for whatever time frame in which you get paid.  It is important to keep track of your cash flow or else planning for bill payment, debt management, and savings can all be ruined if you do not have the cash for these things.  You cannot pay a bill unless you have the cash to do so.  You cannot reduce your debt unless you have the cash to pay it down.  Finally, you cannot save money if you have no money to save.  As such, everything about financial planning revolves around your cash flow, when it comes in, and how you are going to use it.

You have to know how much cash you have coming in or else you cannot make an effective financial plan.  If you do not have a set amount of money coming in each month (due to a commission based salary, or some other bonus package), you will need to use an average cash flow figure in order to appropriately plan your finances.  As such, if you made $1,000 this month but $2,000 next month,  plan your budget on a $1,500 per month cash flow.  In months that you make $2,000, you will have excess cash.  In months that you make only $1,000, the excess cash from the $2,000 months will cover any deficiencies.

If you have a set income, meaning that your paycheck never changes, it will be easier to prepare a financial plan as you will know exactly how much money you have coming in the door each month.  This will enable you to be more precise with your budgeting.  However, if you plan to use every dollar of your cash flow, you will be in trouble when an emergency strikes.  As such, always plan on putting part of your cash away each month in order to have an excess cash amount in the event of an emergency.

Cash flow is also vitally important in determining whether you have the ability to take a loan.  If you know what the monthly loan payments are, you will be able to plan accordingly based upon your monthly cash flow.  Just because you may take home $5,000 per month does not mean that you have $5,000 of excess cash each month.  After paying all of your obligations and factoring in the cost of living (i.e., food, water, utilities, etc.), you will hopefully be left with excess cash.  If you take out a loan, the excess cash is what you need to consider in determining whether obtaining a loan is a good idea.

Remember, your cash flow is an integral part of proper financial managment.  If your income fluctuates, use averages to set your budget.  Always save some part of your monthly cash for an emergency.  Finally, factor in all expenses before determining whether you have the cash flow to take a loan.