Budgeting Vs Cash Flow Planning

<h1>Budgeting Vs Cash Flow Planning</h1>Author: <a title="David Carson" href="http://www.articlesbase.com/authors/david-carson/56419.htm">David Carson</a> The dreaded “B” word drums up a lot of emotions in people. Often budgets are associated with cost cutting or even financial failure or bankruptcy. However budgets are by businesses and other successful people to establish a spending plan and to map out their financial future. Budgets are a useful starting point in establishing your financial plan but they are narrowly focused and typically only look at your expenses. I like to establish a cash management plan that looks at your cash flow needs over time that can then be used to establish a strategy to meet your needs. The cash flow management plan will help you tie in your household net worth statement and net worth goals. Cash Management Planning 101 In my article on net worth planning I showed you how to prepare a household net worth statement. The household net worth statement measures the value of what you own and what you owe at a single point in time. On the other hand, the cash flow statement tells you where your cash came from and where it went over a period of time. Note that net worth can only grow if cash flow is positive or if you have savings. Savings are positive when the annual cash in flows exceed the annual cash out flows. The accumulation of savings is why we use cash management planning as one of the key financial tools. If your savings over a period are not adequate to achieve your household net worth target, then steps must be taken to correct the situation either by increasing income or reducing expenses. If your adjustments still do not help, you must re-evaluate your net worth goal. If you are generating savings cash management planning can help you set a higher net worth target and then meet the target with higher savings. On the other hand, If you have inadequate savings techniques you can use to improve your cash flow include: <ul> <li>Control your current expenses by restraining spending on discretionary purchases such as coffee at the local shop or buying lunch everyday at work.</li> <li>Restructuring your debts <ul> <li>Consolidating high interest credit card debt</li> <li>Refinance your home to lower interest expenses or payments</li> <li><a href="http://blog.personal-money-tips.com/up-to-the-eyeballs-in-debt/">Discard or discontinue credit cards</a></li> <li>Defer big ticket purchases</li> </ul> </li> <li>Reposition assets to improve cash flow by postponing the purchase of: <ul> <li>Non-essential consumer goods (i.e. that fur coat)</li> <li>Non-income producing investments like gold, coins, or art</li> <li>Negative cash flow investments in leveraged real estate or other investments requiring long-term periodic payments</li> </ul> </li> </ul> Preparing A Cash Flow Statement The starting point for cash flow planning is the cash flow statement. The statement looks much like a budget and if you have never done a budget before you will need your bank and credit card statements to determine your historical cash receipts and disbursements (I include credit cards because many times people substitute credit cards for cash). Looking At Your Cash Flow Statement The main objective of cash management planning is to find out how adequate your savings are to meet your net worth objectives. Net worth targets can be refined to include investment, educational and retirement funding objectives. Cash management planning helps achieve these goals systematically. Cash flow planning helps you identify flexible (i.e. discretionary) expenses and fixed (or non-discretionary) expenses. Also helps you understand your situation and identify any excess spending and control cash outflow to a more desirable level. Note that the flow statement will not cover every single cost. Many of us have very large “other” out flows of cash that are unexplained. If you have kept a monthly budget and stayed on target you are on the right track. However, the budget is only a part of the equation and the key to long term success is the development of a systematic savings strategy. The savings strategy includes specific plans to generate required savings, systematically direct savings to specific financial goals.About the Author: David Carson is a professional accountant and publishes <a href="http://blog.personal-money-tips.com/">Personal Money Tips</a>Article Source: <a href="http://www.articlesbase.com/">ArticlesBase.com</a> - <a href="http://www.articlesbase.com/personal-finance-articles/budgeting-vs-cash-flow-planning-395238.html" title="Budgeting Vs Cash Flow Planning">Budgeting Vs Cash Flow Planning</a>

The dreaded “B” word drums up a lot of emotions in people. Often budgets are associated with cost cutting or even financial failure or bankruptcy. However budgets are by businesses and other successful people to establish a spending plan and to map out their financial future. Budgets are a useful starting point in establishing your financial plan but they are narrowly focused and typically only look at your expenses.

I like to establish a cash management plan that looks at your cash flow needs over time that can then be used to establish a strategy to meet your needs. The cash flow management plan will help you tie in your household net worth statement and net worth goals.

Cash Management Planning 101

In my article on net worth planning I showed you how to prepare a household net worth statement. The household net worth statement measures the value of what you own and what you owe at a single point in time. On the other hand, the cash flow statement tells you where your cash came from and where it went over a period of time.

Note that net worth can only grow if cash flow is positive or if you have savings. Savings are positive when the annual cash in flows exceed the annual cash out flows. The accumulation of savings is why we use cash management planning as one of the key financial tools.

If your savings over a period are not adequate to achieve your household net worth target, then steps must be taken to correct the situation either by increasing income or reducing expenses. If your adjustments still do not help, you must re-evaluate your net worth goal.

If you are generating savings cash management planning can help you set a higher net worth target and then meet the target with higher savings. On the other hand, If you have inadequate savings techniques you can use to improve your cash flow include:

Control your current expenses by restraining spending on discretionary purchases such as coffee at the local shop or buying lunch everyday at work.

Restructuring your debts
- Consolidating high interest credit card debt
- Refinance your home to lower interest expenses or payments
- Discard or discontinue credit cards
- Defer big ticket purchases

Reposition assets to improve cash flow by postponing the purchase of:
- Non-essential consumer goods (i.e. that fur coat)
- Non-income producing investments like gold, coins, or art
- Negative cash flow investments in leveraged real estate or other investments requiring long-term periodic payments

Preparing A Cash Flow Statement

The starting point for cash flow planning is the cash flow statement. The statement looks much like a budget and if you have never done a budget before you will need your bank and credit card statements to determine your historical cash receipts and disbursements (I include credit cards because many times people substitute credit cards for cash).

Looking At Your Cash Flow Statement

The main objective of cash management planning is to find out how adequate your savings are to meet your net worth objectives. Net worth targets can be refined to include investment, educational and retirement funding objectives. Cash management planning helps achieve these goals systematically.

Cash flow planning helps you identify flexible (i.e. discretionary) expenses and fixed (or non-discretionary) expenses. Also helps you understand your situation and identify any excess spending and control cash outflow to a more desirable level. Note that the flow statement will not cover every single cost. Many of us have very large “other” out flows of cash that are unexplained.

If you have kept a monthly budget and stayed on target you are on the right track. However, the budget is only a part of the equation and the key to long term success is the development of a systematic savings strategy. The savings strategy includes specific plans to generate required savings, systematically direct savings to specific financial goals.

David Carson is a professional accountant and publishes Personal Money Tips

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Article Source: http://www.articlesbase.com/personal-finance-articles/budgeting-vs-cash-flow-planning-395238.html

Article Tags: Budget, Financial Planning, Cash Flow

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