Individuals are no different from businesses and the basic principles stay the same.
The term 'cash flow planning' is associated with companies. However, with increasing cash management requirement at a personal level, such planning by individuals is also imperative.It is said that ready availability of finance is critical for every organisation and it can 'make or break a business'. So, too, of our personal finances. Without enough cash flow, we may not be able to pay our dues, do the things that give us satisfaction or reach out to set important financial goals.
Simply put, cash flow refers to the inflow and outflow of money. Cash flow planning is tracking and projecting your cash inflows from salaries, self employment income, investments and other income, and comparing them to your cash outflows (expenses, dues, loan payments, credit card dues, capital expenditure taxes, etc.). The difference between the two is your net cash flow.
Cash flow planning is required to be done prior to an investment exercise. You will then be in a better position to know how your finances look, what you can invest and for how much time without causing a strain on cash requirement. It will also enable you to understand if a particular investment matches your flow requirement. The planning horizon can be near term, medium term and long term.
Cash flow plans are used by companies to have proper control on expenditure and investments. Similarly, without proper cash flow planning, one could easily get caught in a debt trap or be unable to create wealth.
The important point is that besides generating cash, one needs to have a plan to deploy it. And then implement the plan to the tee. Of course, the plan will need altering from time to time because as you grow older, the instruments where the money needs to be parked will keep on changing. Here are a few tips to better your cash flow and deployment ideas.
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INVESTING INFLOWS
Regular Income Plans: In case you invest in bank fixed deposits, company fixed deposits, bonds or debentures, opt for the regular income plan. Similarly, you can invest in a post office monthly income scheme, which offers a yearly eight per cent taxable return, payable on a monthly basis, with a maturity bonus of five per cent at the end of the term period. If you invest in mutual fund schemes, go for the dividend option. All these methods will ensure regular flow of money to you. This gives dual advantage. One, you can meet contingent expenditure. Two, you can invest in an instrument available which is giving better return.
Longer duration investment: By opting for investments with a longer duration, with payout option, you can ensure steady flow of income. For instance, NCDs issued by L&T Finance, Shriram Transport Finance, central government securities and corporate bonds. The interest rate is determined at the time of issue in such cases.
Lumpsum or instalment basis: In case of investments, you can have a strategy to do it by way of a recurring deposit (RD) or a systematic investment plan (SIP), rather than making a lumpsum investment. Go for RD or SIP, as it will smoothen your cash flows and avoid hiccups during emergencies. It helps you to build your wealth step by step without pinching your pocket much.
Laddering: This is an investment strategy that calls for establishing a pattern of rolling maturity dates for a portfolio of fixed-income investments. Your portfolio may include fixed deposits (FDs) or National Savings Certificate (NSC) or Kisan Vikas Patra (KVP). For example, instead of buying one NSC worth, say, Rs 3,00,000 with a six-year term, you buy twelve NSCs of Rs 25,000 each, maturing either a month or quarter apart. As each NSC comes due, you can reinvest the principal to extend the pattern.
Or, you could use the money for a pre-planned purchase, have it available to take advantage of a new investment opportunity or use it to cover unexpected expenses. You can use laddering to pay for children's education or family events with maturities matching the event date. And, if you ladder, you can avoid liquidating a large investment. Similarly, you need not reinvest your entire principal at a time in an instrument when the interest rates may be low.
MANAGING OUTFLOWS
Let us also look briefly at some points to manage cash outflows:
Reduce expenses: Eliminate expenditure on items not very essential or not giving required satisfaction. For example, a club facility you may be availing for not more than 10 occasions in a year but having to pay fees annually.
Defer purchases of non-income producing assets. Defer the acquisition of non-income or negative cash flow asset acquisitions. Reduce, restructure, defer. This is the key to reduce cash outflow and improve cash inflow.
Debt management: In case of home loan or vehicle loan, you may prepay a part of the liability at regular intervals, subject to cash availability and also considering pre-payment charges.
Avoid cash crunch: It is very important to avoid a cash crunch at any point, as it may lead you into a debt trap. A debt trap is a situation where you borrow more to repay existing debts and interest obligations. It is important to focus on your goals and the value each purchase brings to you. By avoiding lavish spending, you may attain your financial goals earlier.
Do monitor your cash flow at regular intervals. Also plan your income and spending in a synchronised manner. Remember, whether you are a business or an individual, proper cash flow planning can make your financial position healthier and you wealthier!
The author is a freelance writer