There are two major statements or reports that are included in a financial plan. These reports are used to organize quantitative financial data in the effort to turn it into useful financial planning information. The statement of cash flows is a report that lists all of the income and expenses of individual or family. This report is modeled after the income statement, which is used by corporations to calculate and report revenues, costs of goods sold and income to name a few. Financial plans include this information due to the fact that it provides great insight into the most important part of a financial plan, cash flow.
What is a Statement of Cash Flows
Creating a statement of cash flows is a rather straight forward task. As stated above, this report is used to calculate the cash flows of a client. Cash flows can be thought of as transactional in nature, meaning this report seeks to capture all of the transactions concerning receiving (inflow) or expending (outflow) money in certain categories.
A statement of cash flows can easily be converted into a household budget. In order to accomplish this all that has to be done is to estimate what your future income and expenses will be. This is why the statement of cash flows can be considered the heart of a financial plan.
Organizing Cash Flow Data
To begin organizing your cash flow data create a list of all of your inflows and a separate list for outflows. The following are the most common elements of a statement of cash flows.
- Rents, Annuities
- Capital Gains
- Child Support
- Pension Payments
Cash Flow Planning and Analysis
At this point you should have listed all of your monthly income and expenses and their average amounts. Next we will being to analyze this data, but first we need to do some simple calculations. In order to determine what your total monthly income and expense are, total all of your income and expenses.
Next subtract the expense from the income and hopefully it is a positive number. If it is negative this means that you are spending more than you make on a monthly basis. This is usually due to the use of credit cards or other debt instruments. Finally it’s time to estimate how your cash flow will look in the future by forecasting your income and expenses for the year.
I understand that it can be difficult to create a statement of cash flows for the first time based on these instructions alone. For additional free financial planning resources you can go to YouTube and find a bunch of video tutorials.