All About Cash Flow Planning and Budgeting

Whether you’re an individual or a business owner looking to stay on top of your finances, planning out your budget and overall cash flow is important. Cash flow planning means different things in different contexts. For an individual, it’s about sticking to a budget so you can save money. For business owners, it’s about balancing costs and earnings. In the context of insurance, a cash flow plan allows policyholders to pay premiums in small increments based on their overall cash flow.

You can work with a financial advisor to help you find the right parameters for your cash flow planning.

What Is Cash Flow Planning?

In simple terms, “cash flow” refers to all forms of cash and assets that come and go from anyone. Cash flow planning is the process of managing income and expenses to ensure financial stability and sustainability over time. It involves tracking money coming in and going out, identifying patterns, and making informed decisions to maintain positive cash flow. This planning is crucial for both individuals and businesses to cover expenses, meet financial goals, and avoid cash shortages.

For businesses, cash flow planning helps manage operational costs, investments, and unexpected expenses while ensuring sufficient liquidity. It allows companies to anticipate financial needs, optimize spending, and maintain profitability. For individuals, it involves budgeting income, managing debt, and planning for future expenses, such as savings, retirement, or large purchases.

Effective cash flow planning not only prevents financial strain but also creates opportunities for growth and investment. By understanding and forecasting cash flow, individuals and businesses can make strategic decisions, improve financial health, and achieve long-term success.

Companies value cash flow because it offers a clear distinction between what they owe and what they’re earning. It can also be particularly beneficial for individuals, especially when planning a budget.

Personal Cash Flow Planning

Individuals and families should create a cash flow plan to ensure that they can properly support their spending needs regularly, in addition to creating an emergency fund. Those who don’t have an effective cash flow plan in place risk going into debt to cover their living expenses. Cash flow plans can help people figure out how to best allocate income between savings and spending.

Assume the Smith Family has a monthly income of $6,000. Between mortgage and car payments and groceries and other daily costs, the family usually spends around $2,500, giving them a positive cash flow of $3,500. However, the family’s oldest daughter will need $10,000 to pay for her semester at college next month. Therefore, a cash flow plan can help the family determine what their financial situation will look like over the upcoming months.

Business Cash Flow Planning

Many businesses have a cash flow plan in place to ensure that they’re properly balancing costs and earnings. These might include operating expenses like salaries, rent, taxes, loan payments, equipment purchases, raw materials, business permits and more. But when you make a sale to a customer, that money creates a positive impact on your profit and loss (P&L) statement.

Without a proper cash flow plan, a company may not be able to sustain its business model. This could have dire consequences, as it then may be forced to raise expensive short-term capital, get a loan or even shut down completely.

To create an adequate cash flow plan, a business should note how much it plans to spend and earn in a given period. This can be done by subtracting the company’s accounts payable from its accounts receivable. Here’s a breakdown of each:

Accounts Receivable: This account tracks the assets coming into the business. In most cases, this is the money earned from goods and services you provide.
Accounts Payable: A company’s liabilities are tracked in this account, including payroll, loans and more.

To understand how each works, let’s assume that Company A expects to sell 500 units a month for $100 each. Altogether, expenses and employee wages for that same month are expected to be $40,000. However, because the company has a loan to its name, it owes the bank $5,000 this month. In the end, that leaves Company A with a positive cash flow of $5,000. It can use that money to help further pay off its loan or the funds can be reinvested back into the company for some other purpose.

Just because the previous calculation is positive doesn’t necessarily mean the company has a positive cash flow. This is because a business could theoretically make more money than it has paid out, but those incoming funds may still be pending in accounts receivable. As a result, the money won’t actually show in the company’s account, making its cash flow lower than its profitability.

Cash Flow Plans in Insurance

Personal and business cash flow plans are relatively similar, but insurance cash flow plans differ significantly. In this context, an insurance policyholder can use a cash flow plan to pay for an insurance policy by dividing insurance premiums into smaller intervals. As a result, the size of these payments varies based on the policyholder’s incoming cash flow.

This type of cash flow plan allows policyholders to benefit from holding onto their cash reserves for longer. It also has potential benefits for insurance providers, as its income sources will be vastly more spread out. This arrangement is typically more affordable, decreasing the likelihood that the policyholder defaults.

Cash Flow Planning & Budgeting

As you might expect, cash flow planning and budgeting often go hand in hand. Whether you’re a business, an individual or a family planning out how your cash flow is going to match your spending needs is in direct correlation with an effective budget.

Whereas a cash flow plan focuses on long-term finances, a budget is much more helpful on a micro-scale. Budgets also lend themselves to the formulation of a plan for finding where you can save for the future and retirement.

Budgeting involves being prepared for what lies ahead. On the other hand, spending money recklessly without the guidance of a budget could quickly put you and your family in a bad spot. While cash flow is worth calculating monthly, both Company A and the Smith Family should be fully aware of their financial limitations more regularly.

In either example, the introduction of a major purchase would be unlikely to fit into a cash flow plan. However, through budgeting and other similar tactics, these goals could eventually become attainable.

Bottom Line

Effective cash flow planning is essential for financial stability and long-term success for both businesses and individuals. It complements budgeting, helping maintain financial control in the short and long term. However, it differs from an insurance cash flow plan, which specifically aids policyholders in managing premium payments affordably. In all cases, a well-structured budget is key.

Tips for Creating a Budget

Whether you’re creating a budget for your family or your business, professional guidance might be helpful. That’s where a financial advisor can come in handy. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Creating a budget might feel intimidating, but it’s an important step toward maintaining your financial health. SmartAsset created a budget calculator to help make things easier for you. Plug in your income, location, family size and expenses to see how you’re doing.