Cash Flow Planning

What is Cash Flow Planning?

Cash flow planning is used to identify the activities needed to optimize the net cash flow. Net cash flow is the residue amount after deducting the expenses from the income. If the amount is positive, it can be used for a number of purposes, but the priority would be to go for investment to meet financial goals.

Why Cash Flow Planning?

• Cash flow planning is important because it shows us where our money comes and goes. By, knowing that, we are able to cut down on unnecessary expenses to control the outflows. This will significantly reduce the chances of getting ourselves falling in to the debt trap. It also means to get yourself out of the rat race at the faster pace.

• Cash flow planning enables us too see clearly what is the potential savings, if we are willing to take some efforts. By doing so, it helps to get us out from living on credits to living sufficiently and further bring us to wealth accumulation.

2 Strategies in Cash Flow Planning

There are basically 2 strategies in cash flow planning, namely Optimization Strategy and Maximization Strategy. Optimization Strategy provides a more balanced approach. It sets an acceptable lifestyle of an individual while striving to get the most out of the income for investment or other purposes. Maximization Strategy require more painful actions. For instance, an individual may have to settle for smaller house, smaller car and less eating outside just to maximize the net discretionary income.

If an individual is taking a Maximization Strategy, he may need to be at very high level of self-discipline. A strategy that is too austere may not work as many may feel it becomes meaningless in this mode of lifestyle.

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