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Budget & Cash Flow Strategies
talessi@ariesfoundation.org
Budget vs Cash Flow - Is There A Difference?
What Is Cash Flow Planning?
In simple terms, “cash flow” refers to all forms of cash and assets that come and go from anyone. Companies value cash flow because it offers a clear distinction between what they owe and what they’re earning. It can also be particularly beneficial for individuals, especially when planning a budget.
When it comes to this type of financial planning, a cash flow plan can come in two basic variations: business and personal. Although things work similarly in each context, the end goal is often different. These differences are rooted in the fact that businesses are aiming to gain profits, whereas individuals are usually looking to make ends meet and have some leftover money for their savings.
Personal Cash Flow Planning
Individuals and families should create a cash flow plan to ensure that they can properly support their spending needs on a regular basis, while also creating a fund for emergency reserves. One of the biggest risks that individuals without a cash flow plan face is the possibility of going into debt to cover their needs & expenses. A Cash flow plan is a great way to help everyone get a handle on the best way to allocate income between savings and spending.
Example
Let's take the Jake Family, which has a monthly income of $6,000. Between their "must-pay" expenses; mortgage, insurancfes, car payments, groceries and other daily costs, the family usually spends around $4,500, giving them a positive cash flow of $1,500. However, the family’s oldest son will need $10,000 to pay for her semester at college next year. A cash flow plan can help the family determine what they will be able to set aside and what their financial situation will look like over the upcoming months and year ahead.
Cash Flow Planning & Budgeting
As you might expect, cash flow planning and budgeting often go hand in hand. Whether you’re a business, an individual, or a family planning out how your cash flow is going to match your spending needs, is in direct correlation with having a budget. Think of a cash flow plan as being focused on your long-term finances, while a budget is much more helpful on a micro or day-to-day scale. Budgets also lend themselves to the formulation of a plan for finding where you can save for the future and retirement.
Budgeting involves being prepared for what lies ahead. On the other hand, spending money recklessly without the guidance of a budget could quickly put you and your family in a bad spot. While cash flow is worth calculating monthly, as in the example of the Jake Family, it is good to be fully aware of your financial limitations more regularly. In the example, the introduction of a major purchase would be unlikely to fit into their current cash flow plan. However, through budgeting and other similar tactics, they could manage to make these goals more attainable.
Bottom Line
Cash flow plans for both businesses and individuals are an important step in ensuring financial stability and longevity. They also go along with budgeting as a way to help people (and businesses) stay on top of their finances in both the short and long term.
GOT QUESTIONS? ASK US. WE CAN HELP WITH THAT!
The ARIES Foundation for FInancial Education, Inc. is a nonprofit dedicated to the mission of trying to help everyone have a better relationship with their money. If you need help, or just want to get started, then reach out to us and we'll see what we can do to get you going info@ariesfoundation.org. You can also visit our website to learn more about we do: www.ariesfoundation.org
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