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Cash flow forecasting is a key aspect of personal finance planning, that deserves special attention if you want to reach financial security and be able to foresee any potential money shortfalls. Cash flow is the lifeblood of any business and predicting your company’s future cash requirements is essential if you want to stave off a financial crisis before it hits you. The same principles equally apply to personal finances. While it’s important to track expenses and see where your money has gone, it’s even more vital to know that you’ll have enough cash coming in to cover all your expenses when they fall due.
There are countless reasons why cash flow forecasting is so important, but this by far tops the list: think of it as your “early warning system” that allows you to predict what is going to happen to your cash flow over a specific time frame and take advance measures in case you see a financial disaster coming. As an essential part of personal finance planning, you should perform cash flow forecasting in combination with an analysis of your historical trends on income and expenses and monitoring of your monthly budget performance over a certain period of time. Whereas budgets are based on your active plans for the future, a cash flow forecast is an estimate of future projected income and expenditures based on your past experience. Forecasts are necessarily driven by assumptions and for the forecasts to be realistic and hence useful the underlying assumptions must be as reasonably accurate as possible.
Cash flow forecasts can be as simple or complex as your financial needs dictate. Most families have regular monthly fixed inflows and outflows of cash that are easily identifiable and can be projected more or less precisely, for example: monthly salary, pension, interest (for income) and household bills, food, car, insurance (for expenditures). It is the irregular payments that can cause problems while reconciling your actual results with your forecast, that’s why it’s important to account for any likely changes in your family’s future budget while applying historical data to your forecast. Making cash flow forecasts is like modeling your financial future, therefore you should be careful with the information you use to build your models. A cash flow forecast is usually projected over a period of six or twelve months, although weekly, monthly or quarterly forecasts tend to be more realistic than long-term projections. It’s better to use a personal finance management tool to gather statistical data on your spending or saving habits.
Cash flow forecasting can bring you many benefits, namely because:
- It is your “crystal ball”: cash flow forecasting makes it possible for you to get a glimpse of your financial future before it happens and promptly react to any possible dangers.
- It gives you advance warning on potential money problems. You can efficiently use the available time to work out solutions to overcome the anticipated financial troubles without having to overstretch your budget.
- It helps you predict upcoming cash surpluses that can wisely be used towards your financial goals or to make profitable investments.
- It provides key data for “what if” modeling. You can run various “what if” scenarios, assess the changes in your cash balance and readjust your forecast based on the results. Testing different strategic scenarios will help you prioritize your needs and make better money management decisions.
Cash is king, but so is knowledge. Although it’s based on assumptions and predictions, cash flow forecasting nonetheless provides valuable insight into the likely future evolution of your personal finances. Cash flow forecast is a powerful money management tool that encourages you to plan ahead, prepares you financially for what the future holds and ultimately helps you improve your personal finances.