Cash flow evaluation is a requisite before you leap to any financial decision

Before you leap to any financial decision, be it major or minor, you should always evaluate your cash flow. In simple terms, cash flow signifies your income (cash in) and expenses (cash out). You may consider the below mentioned factors to understand your present as well as future cash flows.  We all know, “If you make the cakes ahead of time, then you’ll be able to focus on the decorations more.”

Future cash flow, either positive or negative, depends on personal unique features like:

1. Age;
2. Time (both during productive and unproductive years);
3. Qualifications and skills;
4. Job security – How others value what you do, the smart-work you do, how difficult it is to replace you & how do you upgrade yourself with time;
5.  Net worth;
6. Your family commitments & responsibilities towards dependents;
7.  Physical & mental health; etc.

Do you compare your financial status with someone who has well stated and specifically defined set of personal aspirations and objectives?

We have been working with clients who are business owners, professionals, executives & retirees etc. Many have limited income with huge demand of asset requirements. Those who are disciplined, they can achieve their goals, if they’re well planned. As Certified Financial Planner in Kolkata, we hand-hold our clients through unique financial planning processes to enable them achieve their targets.

Those who’re almost in approaching stage with lot of family commitments like children’s higher education or marriage or both, what should they do?

When you get your bank and credit card statements, sometimes you are taken aback since you are unable to control some of your unplanned expenses which are flexible in nature. You can easily avoid this mess. A simple method of accounting for income and expenditures (cash flow) is to prepare personal financial statements. Financial statements proffer you with a manifestation of your financial conditions and help with budgeting.

Broadly, there are two types of personal financial statements:

• The personal cash flow statement &
• The net worth statement (can also be called personal balance sheet).

Both are the barometers of your personal finance. All of your financial decisions and activities have a direct effect on your financial health. As Fee Only Financial Planner in Kolkata, we believe that the consequences you face at present and you’ll face in the future depend on today’s activities and decisions.

Cash flow statement will give you the idea of such expenses which you need to cut down

Our simple suggestions related to your family cash flow are:

• Plan for expenses;
• Reduce or eliminate unnecessary expenses;
• Make a provision for unplanned expenses;
• Save for pre-defined financial goals;
• Insure your future income;
• Plan for contingencies;
• Prioritize your savings than spending or first you save and then you spend &
• Review your financial plan at predefined intervals,
• Try to offset inflation and generate tax efficient cash flow during retirement from “Retirement Corpus” (it’s essential to boost your investment returns).

The next step is you have to cover the following goals, which are unique in nature:

• Insurance planning;
• Contingency funding (It includes income replacement plan if he or she is totally & permanently disabled due to injury or illness & is unable to work);  
• Children’s education funding;
• Marriage funding;
• Divorce planning;
• Retirement planning;
• Purchase of house:
• Purchase of car:
• International vacation;
• Tax planning;
• Debt planning;
• Cash flow statement for at least of five years;
• Startup capital/seed money &
• Estate planning; etc.

“You can’t fight an evil disease with sweet medicine,’ says the ng’anga.”
― Panashe Chigumadzi

Would you like to compromise with your goals/aspirations because of unfavourable cash flow?

If you’re spendthrift, then try to increase your income. Otherwise, during approaching stage or distress, you’ll be left with no alternative way but to sell personal assets or take hard money loan against your personal assets like gold or house.

Personal financial management is important wherein an individual or family prepares a budget. Thereafter, they follow the budget by spending and saving the hard earned money over time, taking into account various life cycles & financial goals.

The above explanations are not enough, unless we illustrate with one real-life financial planning example. Here we have exemplified one practical financial consequence. As Financial Advisor in Kolkata, our core responsibilities are financial planning & working with the client to implement the Financial Plan with periodical reviews. We have changed the names of my clients because of confidentiality clause.  These stories hold great power and we want to share them with you.

Practical Scenario

Mr. Dinesh Trivedi & Mrs. Leesa Trivedi, both are working couples, 50 years and 48 years old respectively. Both of them are private salaried. Both of their net total yearly income is Rs. 10,95,000. They have only one daughter, Sonam who’s pursuing Engineering from hostel. Their head wise yearly expenditures, insurance premium, regular savings are:-

Mr. Trivedi was looking for a SEBI Registered Investment Advisor in Kolkata and they had approached us.

Let us elucidate the budget that exceeds their incomes. Their biggest financial fear is whether they can build retirement corpus within next 10 years or not?

Can you imagine the consequences of their subsequent years? Not producing enough income to meet all the bills and not having surplus fund to funnel it into retirement kitty is a serious concern.

Immediately after their marriage, while they extended their family, they took the future cost of Sonam’s higher education lightly. Education is one of the biggest cash outflows. Moreover, global education labels may come to India in future. Education cost will be very high. The education inflation is almost in double digits.  

The Trivedi family bears Rs. 3,08,000 p.a. towards daughter’s education now and will have to continue for another 4 years.

Another certain need is retirement planning.

How much cash flow do they need in retirement?

Retirement is a goal which needs to be addressed on priority. One must take this seriously and start saving for a comfortable retirement.

They may survive 20 years after retirement. If today’s cost of living is Rs. 5,00,000 in a year, the figures are daunting and due to inflation, 10 years from now it may cost Rs. 9, 00,000 in a year.

They need Rs. 1.46 crores in retirement (after considering inflation & income tax). If Mr. & Mrs. Trivedi utilize their investment asset, they can generate only Rs. 21 lakhs. Therefore, the deficit is Rs. 1.25 crores.

To bridge the gap,  they need to invest Rs. 56,413 per month. The investment strategy should be based on their risk profile, time horizon of investments, personal and macroeconomic factors. If we notice the cash flow (resources), there is no surplus for further investment for retirement kitty, rather they have huge shortfall. To meet the shortfall, often they use their credit cards. Their expenditures exceed their income.

On the other hand, we have figured out their net worth, which is as follows:

1. Total Investment Assets: Rs.16,00,000
2. Total Personal Assets: Rs. 48,50,000
3. Total Liability: Rs. 17,80,000

    Net worth= Rs. 46,70,000

Judiciously maintaining cash flow will allow you to build wealth over time by prudently investing surplus money

It can be gauged that their personal assets are more than their investment assets. Personal assets will not generate any income during retirement.

If the investment assets are more than personal assets, it could have been mapped either with daughter’s education or retirement corpus or both education and retirement corpus.

To conclude, while they had targeted to retire at 60, daughter’s graduation and post-graduation in engineering college, they should have assessed their financial status and their aspirations logically.

They could start investment for education and retirement earlier on priority basis. They had borrowed money for costly car and residential flat. Total EMI to income ratio is 28% (proportion of income which drains out as EMI).

A positive cash flow occurs when you earn more money than you spend. This enables you to pay bills and you have surplus fund to invest.

A negative cash flow means you’re receiving less cash than you spend. You have to struggle to pay immediate bills and need to borrow money to cover the shortfall.

Therefore, whenever you’re going to take an impulsive financial decision like buying a car/ flat, spending for any family commitment like marriage/ education/ vacations etc., always consider your cash flow. Borrowings also become more expensive as interest rates are huge. Personal loans and credit card loans are too costly.  Positive cash flow does not happen by chance, it happens because of well-defined cash management. So, it’s as important as your health check-up.