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