Organizing Financial Planning Data

At this point we will assume that you have collected all of your qualitative and quantitative financial planning data and are ready to start the analytical portion of the financial planning process.

However before jumping into the details its important to organize the financial planning data and create a few different reports that help turn the data into information. Once you have relevant information, you can begin to determine the strengths and weaknesses in your current financial situation. After you gain an understanding where your financial plan needs the most attention you can begin to make the necessary changes to get yourself on the right track.

Organizing Financial Planning Data

There are four major types of financial data; income, expenses, assets and liabilities. It’s important that you understand the definition of each. You will use them later to construct your financial statements.

Income - Income can be defined as any monetary asset that is received in the form of compensation, tips, interest, dividends, rent and other forms of earnings. They can also be described as cash inflows.

Expenses - Expenses are defined as an outflow of cash or other valuable asset that is usually provided in exchange for a product or service.

Assets - Assets can be described resources with positive economic value. Assets include but are not limited to: cash, stocks, bonds, houses and cars. Assets can be both tangible and intangible. Assets should not be confused with income, as their are used to describe two similar but different types of data.

Liabilities - On the other hand, liabilities are obligations that may result in a transfer of assets sometime in the future. Liabilities are usually outstanding loans and other types of debts. Keep in mind that liabilities are not the same as expenses as they are an obligation to pay in the future.

Introduction to Financial Planning Statements

There are two major statements or reports that a Financial Planner usually creates with a Client’s financial data. These statements allows them to assess the health of a financial situation, similar to how accounting data helps investors determine the financial health of company. The following are the two most common financial planning statements.

Statement of Cash Flows - The Statement of Cash Flows in financial planning is a little different than that in the accounting industry. In financial planning the Statement of Cash Flows (or Income Statement), is a listing of cash inflows and outflows. This report is extremely effective in illustrating where all financial resources are coming from (income) and going to (expenses).

Statement of Net Worth - The second popular financial planning report is the Statement of Net Worth. In accounting, the Balance Sheet provides generally the same information. The Statement of Net Worth seeks to determine total assets, total liabilities and then the difference between the two being net worth. Thus this report totals all of your cash, investments and other assets (assets) and subtracts the value of the money that you owe (liabilities). What is left is your net worth.

Now that you have organized your data into income, expenses, assets and liabilities its time to go into more detail about how to create your Statement of Cash Flows and Net Worth. These two reports will help you understand your current financial situation and where your financial plan needs the most attention.