Topic 3

Cash Flow Management

Topic 3: Cash Flow Management

• Learning Objectives – (a) Identify opportunities and challenges related to a

client’s cash inflows and outflows and make recommendations to assist the client in meeting their current needs and long-term financial goals.

– (b) Communicate the need for liquid assets and emergency funds and recommend strategies for accumulating the appropriate levels of funds.

– (c) Calculate savings required to meet financial goals and recommend how to incorporate planned savings into the cash flow plan.

Topic 3: Cash Flow Management • Cash Flow Management is the process of

monitoring and analyzing cash flows to ensure they are used effectively toward reaching goals

• Stages of Cash Flow Management – Cash Flow Analysis – Cash Flow Planning – Budgeting

• Emergency fund planning • Debt management ratios • Savings strategies

Topic 3: Cash Flow Analysis

• Gather data on income and expenses and organize it within the Statement of Cash Flow

• Analyze for strengths, weaknesses, opportunities, and threats (SWOT)– May reveal situations where resources are being

used ineffectively or inefficiently – Makes clients more aware of saving and spending

habits

Topic 3: Cash Flow Planning

• Attempts to determine the optimal use of net cash flows

• Net cash flow = income – expenses – Positive net cash flow • May be allocated toward goals or used for consumption

– Negative net cash flow • Steps must be taken to increase income, decrease

expenses, or both

Topic 3: Budgeting

• The tool that is used to allocate projected cash inflows toward savings and expenses

• Can be used to “create” positive net cash flow by seeking greater efficiency – Positive net cash flows can then be allocated

toward achieving goals • Creating the budget will require the client to

think about which expenses are discretionary and which are nondiscretionary

Topic 3: Budgeting • Advantages

– Reveals inefficient uses of resources – Provides a way of measuring progress – Helps motivate the client

• Disadvantages – May lead to wrong decisions – May stifle creativity – May be boring and tedious

• Suggestions – Keep it flexible – Keep it short and simple – Begin with estimate of income – Use it to understand actual versus planned results (see example page

3.14)

Topic 3: Emergency Fund Planning

• Clients should have an adequate fund that can be drawn upon quickly if needed to cover major unexpected adverse events

• Typically 3 to 6 months of the client’s expenses depending on the client’s position and economic climate

Topic 3: Debt Management Ratios

• Consumer debt payments should not exceed 15% of take-home pay

• Monthly mortgage payments should not exceed 28% of gross income or one week’s take-home pay

• Monthly payments on all debt should not exceed 36% of monthly gross income

Topic 3: Cash Flow Management

• Analyzing strengths and weaknesses in the plan includes evaluating the client’s emergency funds and use of leverage

• If the client does not have adequate emergency funds and/or is over-burdened with debt, investment recommendations should not be made until these weaknesses have been dealt with.

Topic 3: Savings Strategies

• Savings should be planned as part of the budget and not considered a residual that will simply materialize if expenditures are controlled – Typically 5% to 10% of annual income – The actual savings rate needed to reach the

individual client’s goals will be calculated within the plan

• Transfer a specific amount each month automatically from a checking account to a savings account

End of Topic 3