1. Topic 3 Cash Flow Management

2. 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.

3. 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

4. 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

5. 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

6. 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

7. 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)

8. 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

9. 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

10. 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.

11. 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

12. End of Topic 3