Maximize Your Cash Flow

You’ve heard it a million times – cash flow can make or break a business. The same can be said of any woman’s personal finances. Without adequate cash flow, you may not be able to pay your bills, do the things that bring you the most joy and satisfaction, or reach important financial goals you’ve set. What is cash flow planning? Tracking and projecting your cash inflows from wages, self employment income, investments and other income, and comparing to your cash outflows (bills, loan payments, taxes, etc.). The difference between the two is your net cash flow. Why is cash flow planning important? It means the difference between achieving financial goals or not; whether you’re saving for a down payment on a new house, putting your children through college, or planning to retire early. Careful cash flow planning allows you to make smarter decisions with your money, identify problems down the road and fix them before they occur. The first step in planning your cash flow is knowing where you spend your money. The best way to track spending is with pen & paper, spreadsheets or a software program. The best method for you is the method that you will actually use on a regular basis. Project your spending for 12 months or more so you include annual and other infrequent expenses. Update your cash flow plan at least monthly. If you are experiencing a cash flow crisis, track and project your cash flow on a weekly basis. Create best and worst case scenarios and create appropriate responses to both. When estimating income, use conservative estimates if your income fluctuates month-to-month. For example, if your best case is a 50% income increase, how will you use the extra cash? Put it in your retirement plan or spend it on other financial goals? If your worst case scenario is a 50% drop, how will you cover monthly expenses? By planning best and worst case, you’re ready for anything. Prioritize your financial goals and determine how much you need to reach those goals. Whether you’re saving for a new car or for your retirement, you’ll more likely achieve your goals if you create a road map and follow it. Create “rainy day” and “emergency” funds. Rainy day for infrequent or unusual expenses (car insurance, annual vacation, home improvements). Emergency funds are for short periods of unemployment, unexpected medical expenses and other large surprises. Having money set aside for contingencies means financial dreams aren’t replaced by nightmares. Watch your spending. Focus on your goals and the value each purchase brings you. Is it worth the expenditure or will it put a bump on your map to the future? Avoid lavish spending if it means delaying or sabotaging your progress to those goals. Finally, update your cash flow projection regularly. Monitor spending and periodically re-evaluate goals. Remember, for businesses and for you, cash flow planning is one difference between success and failure. About the author: Kristine A. McKinley, CFP, CPA, and founder of Beacon Financial Advisors, teaches individuals and families how to invest and plan for retirement, college, and other financial goals. Kristine offers financial and tax planning on an hourly, fee-only basis. To sign up for free financial planning tips, worksheets, checklists and more, visit http://www.beacon-advisor.com