What is Cash Flow Planning?

What Is Cash Flow Planning?

Let’s start by getting on the same page regarding what we mean by cash flow.

Cash flow refers to the cash and assets that come in and go out of someone’s possession—be it an individual or a business. And depending on your clients, the way they look at cash flows can vary. 

Cash flow planning is often part of the larger financial planning process.

It works differently for individuals and businesses because the goal is often different. Businesses aim to gain profit, while individuals usually plan around making ends meet and having extra money to deposit into their savings and retirement funds.

Due to its nature, businesses typically utilize more complex documents than individuals.

Other than cash flow planning, the terms ‘cash flow projection’, ‘cash flow forecasting’, and ‘cash position’ are commonly used as well, which may confuse some people as these terms sound similar to each other. As a financial advisor, it’s vital for you to understand what each of these terms means.

  • Cash flow planning is the practice of estimating a person’s or a business's cash receipts and the expenditures that are expected to happen within a certain period of time. However, this usually refers to the whole process, encompassing the actual plan down to the day-to-day balancing of business expenses and income, which includes tracking and monitoring.

  • Cash flow projection is the detailed breakdown of the money expected to come in and out of the business, which may include projected income from sales and account receivables, as well as projected expenses that may be represented in your account payables.

  • Cash flow forecast usually refers to the goal of cash flow planning—that is, how the cash flow for your business would look within a pre-determined future time period. Most businesses set this time period to 12 months.

  • Cash position refers to how much cash a business has on hand at a time. It can measure assets with high liquidity, such as the cash you have in your bank account, as well as raw materials or perishable inventories in its related businesses (i.e. fruits and vegetables for a grocer).

The Benefits of Cash Flow Planning

Most businesses have a cash flow plan in place to make sure that their profits and expenses are effectively balanced.

It’s not a stretch to say that cash flow management is necessary for a business, considering that managing cash and income is a large part of its operations.

A cash flow plan helps a business understand whether it will earn enough money to cover its expenditures so it can sustain the business model. Otherwise, the business may be forced to find expensive short-term funding, a loan, or even shut down entirely.

Other than gaining important insights into a business's asset movements, cash flow plans can also be used to allocate the budget properly, track potential cash inflows, as well as further plan for changes in income or expenses.

Timely Payments

Fluctuations in the market are bound to happen, and this will no doubt affect businesses to a certain degree.

Having a cash flow plan in place helps business owners expect times when they might be low on cash, therefore giving them greater confidence in paying their staff, suppliers, and other providers on time.

Reliable payment is a big part of good business relationships — ensuring timely payments is important to guard these relationships. Sustain more of these relationships and you can undertake more projects as a business, which ultimately leads to more opportunities for a business to expand and grow

Flexibility for Future Payments

A cash flow plan helps you gain better visibility over your money — knowing where your assets are is the first step to financial flexibility.

With better financial flexibility, you’ll be able to access new funds for unexpected purposes — whether it’s because of a crisis or an opportunity — without compromising your financial situation.

A well-implemented cash flow plan helps you anticipate unexpected expenses. This leads to the business being more resilient, especially when seizing unexpected opportunities for growth that might need significant seed investment.

Actionable Insights

A cash flow plan helps businesses anticipate changes that may occur. 

In the planning process, the parties in charge of planning — which can be the owners themselves or a dedicated financial team and consultants such as financial advisors and planners — will have to look at past performances of the business. This can include cash flow statements and other financial statements, such as balance sheets and income statements, before doing estimations.

This process provides valuable insights into how well the business was run in the previous period and helps the finance team anticipate the business's ability to cover upcoming expenses.

For example, after analyzing market trends, businesses can aim to undertake bigger projects or create new products to grow their business. But this is only possible if they gain more capital since committing to launching a new product or feature means they’ll need money to invest in the development.

It’s also necessary to track and manage the cash flow in real time during day-to-day operations. Valuable insights can reduce business expenses, which may not be much but can add up in the end.

What to Include in a Cash Flow Plan

There are three types of cash flow documents, and you might need all three when you’re running a business as each serves a different purpose.

In order to create a cash flow plan that suits your business and goals, it’s necessary to know these three types of cash flow.

Financial Cash Flows

Financial Cash Flows, or cash flows from financing (CFF), show the net flows of cash coming from funding sources that are usually paid with interest.

It’s used to fund the company as well as its capital, and give investors an insight into how strong the company is financially and can determine how well-managed its capital structure is. Financial activities that should be recorded in the CFF include, but are not limited to, loan payment, equity, and paying dividends to investors.

Investment Cash Flows

Investment Cash Flows, or cash flow from investing (CFI), reports how much cash a business has generated or expended from investment-related activities within a specific period. This includes buying speculative assets, investing in securities, or selling securities or assets of the company.

When a CFI plan shows a negative instead of positive cash flow, it does not always mean that something bad has happened or will happen to the company.

It can merely indicate that a significant amount of cash is being invested into the long-term growth of the business.

However, it doesn’t always mean a good thing, either. It’s important to understand the context when it comes to cash flow plans. 

For example, if the investment is being made in research and development for the first time, it’s normal to see the CFI showing a negative. But, if the investment effort has been ongoing for quite some time and the payoff seems abysmal, perhaps further considerations should be put into that investment.

Operational Cash Flows

Operational Cash Flows, or cash flows from operations (CFO), show cash flows involved directly during the normal day-to-day of a business — such as the sale of goods or services or operating expenses like rent and payroll. By logic, a business's CFO must have more inflows than outflows for it to be viable in the long run. 

A business's operational cash flow can give an insight into whether it can afford to improve or expand its capital, such as if it can invest in more labor, machinery, or software.

An important component of a CFO is the operating cash flow ratio. This is a number that shows whether a business has enough cash to pay off its current liabilities, and for how many times, according to the amount of cash the business can generate within that period of time.

Present Well-Rounded Financial Plans with Asset-Map

A cash flow plan is necessary for a business. Cash flow statements provide various valuable insights into how a business operates, including financial wellness, assessing potential risks, or when to take advantage of certain opportunities.

That said, a business's cash flow plan can be complicated. 

Documents are great when you need to analyze your client’s financial situation. However, a visual representation of their finances will be better to take to a meeting.

A visual map helps you paint the big picture that your client needs to focus attention on during the meeting.

You’ll be able to lead a more productive meeting when you can direct the conversation to the things that need discussing instead of getting distracted by all the numbers.

Schedule a demo and see how Asset-Map’s visual map helps you excel with well-rounded plans for your clients that have allowed other users to have more productive conversations with their clients.

TJ Hill