Cash Flow Statement – What is its importance in your Financial Planning?
Cash Flow Statement is an important part of the “Financial Planning“, in your Financial Goals journey.
All of us will be having some “Financial Goals” in our life.
In addition, a few goals are house buying, retirement planning or financial freedom planning, child higher education and child marriage, etc.
However, You may be having a few extra financial goals apart from the above goals.
Before understanding the Cash Flow Statement, I advise you to understand What are the different ways to achieve a Financial Goal.
Click this link to read about How to achieve a Financial Goal.’
Now, after reading the above ” Financial Goals” article, you must have understood, How to achieve your Financial Goals.
But a question should strike your mind.
i.e am I able to achieve all my Financial goals?
Yes, it’s an important question that one should ask yourself while preparing your Financial Planning.
In other words, simply this statement will tell you whether you can become Big Hero like Sharukh or a medium to a small hero like Abhishek Bachan today itself.
A comedian from my Andhra Pradesh state who has his full calendar filled with opportunities a few years back.
Once he became a comedy hero now is left without very few or no opportunities.
After wasting 10 productive years, that Hero again looking for comedy opportunities.
If he knows sure-shot information, then he may have not tried to become a Hero.
In addition, He would have remained as a comedian only.
But that kind of information, He may haven’t received that day that he decided to become a Hero.
When it comes to Your Financial Goals, The Cash Flow statement which I am about to explain in this article will tell you that How many “Financial Goals that you can achieve.
In addition, It also will tell you that the amount than you can afford for your financial goals in the future.
Let’s Understand this Cash Flow Statement importance in Financial Planning with an Example.
I have taken a case study as shown in the above image.
Now, Let’s calculate the future values of the financial goals.
In addition, Let’s calculate the amount needed to invest for his both son’s MBBS goal.
In the above image, you can see that Mr. X needs 95 lakh for his child -1 MBBS goal when child 1 attains age 18.
In addition, Mr.X needs to invest Rs.23,600 in order to accumulate funds for child 1 higher education goal.
Now, Let’s analyze child 2 MBBS goal for Mr.X as we did for child 1.
In the above image, You can find that Mr. X needs 1.1 crores for his child 2 MBBS goal.
In addition, Mr. X needs to invest Rs.21,658. to accumulate funds for child 2 MBBS goal.
Now, We can Create a Cashflow Statement in order to know “Financial Goals” that Mr.X can achieve or not?…
In the above image, You can see that the Surplus/Deficit column shows a big “-Ve” value ( Rs.-2,44,236) for the first 7 years.
That means Mr.X can not achieve some of his “Financial Goals”.
So, We have to try to remove some unimportant goals from the above cash flow statement.
Here, in this Mr.X case study, Car is not a mandatory goal for him.
In addition, Child 1 and Child 2 MBBS goals are higher priority goals for Mr.X.
Hence, Let’s remove Car goal from the cash flow statement.
In the above image, You can find that I have removed the Car goal and have taken E.M.I value as “Zero”.
In addition, You can see in the ” Rs.55,764″ for the first 7 years in the Surplus/Deficit column in the above image.
That means you are able to invest for child1 and child 2 MBBS goals.
Moreover, X will be able to accumulate enough corpus for their higher education goals.
In addition, for simplicity purposes, I have not taken the salary growth rate for creating the above cash flow statement.
Conclusion about Cash Flow Statement…
This statement will help you to know today itself about your ability in achieving all your financial goals.
If the surplus/deficit column is “-VE” number means, you have to forget some low priority goals.
In addition, sometimes you may have to decrease the goal amount for High Priority Goals too.
However, you can think about increasing your income to invest enough money for your financial goals.
But increasing income is not easy for most of us.
If the surplus/deficit column shows a “+Ve” number means that you can achieve all your goals related to money.
In addition, You can add some more financial goals to your financial planning.
But in my experience, I have created nearly 100 Financial Plans, and very few of their cash flows have “+Ve” Surplus/Deficit column.
So, it is very clear that most of us are assuming that we have enough money to achieve important financial goals, and ending up short of money when that goal arrives.
The solution for this is that you should have your own “Financial Plan” and “Cash Flow Statement”.
If you are not able to prepare these on your own, then it’s better for you to hire a “Sebi Registered Investment Adviser“.