Cash Flow Plans

Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What is the Cash Flow Plan?

Cash flow plans are when an insurance company assesses its incomes and expenses for maintaining and keeping its cash flows above its expenses. It also refers to a plan of an individual to ensure cash liquidity in such a way that they manage their expenses and maintain a minimum balance.

How Does it Work?

A cash flow plan works on the availability of cash funds with the individual or companies. It is, in general terms, the planning for effective use of cash/funds to the benefit of the business and individual by utilizing those funds to their best use. These plans help policyholders and insurance companies financially as they can utilize the cash available in other alternatives and invest. In addition, insurance companies can use the premium amount paid by the policyholder for the regular operating expenses of the businessOperating Expenses Of The BusinessOperating expense (OPEX) is the cost incurred in the normal course of business and does not include expenses directly related to product manufacturing or service delivery. Therefore, they are readily available in the income statement and help to determine the net profit.read more. Therefore, a company and policyholders must maintain its cash flowCash FlowCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. read more and plan according to the cash available for its expenses and spending.

There are three major activities involved in this plan, which both the company and the individual need to concentrate on: 1. Cash Flow from Operating activitiesCash Flow From Operating ActivitiesCash flow from Operations is the first of the three parts of the cash flow statement that shows the cash inflows and outflows from core operating business in an accounting year. Operating Activities includes cash received from Sales, cash expenses paid for direct costs as well as payment is done for funding working capital.read more; 2. Cash Flow from Investing ActivitiesCash Flow From Investing ActivitiesCash flow from investing activities refer to the money acquired or spent on the purchase or disposal of the fixed assets (both tangible and intangible) for the business purpose. For instance, the purchase of land and joint venture investment is cash outflow, while equipment sale is a cash inflow.read more; and 3. Cash Flow from Financing ActivitiesCash Flow From Financing ActivitiesCash flow from financing activities refers to inflow and the outflow of cash from the financing activities like change in capital from securities like equity or preference shares, issuing debt, debentures or repayment of a debt, payment of dividend or interest on securities.read more. Planning of all the above three is equally important information. Cash flow only positively works when there is proper planning for the utilization of the funds available, funds to be raised, and investments to be made.

Cash-Flow-Plans

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Examples of a Cash Flow Plan

Let’s have a real plan to discuss: the Reliance cash flow plan. It is a money-back plan from the Reliance Life Insurance Company. In addition, the survivor would receive returns on his premiums at a pre-accepted percentage at the end of every third year from the year the policy came into effect until its maturity. However, if the life insured dies within the policy tenure, then the nomineeNomineeA nominee is an individual or entity that under financial terms gains access to assets and securities, including bank deposits, real property, and stocks, on behalf of the original owner. While serving as a trustee or guardian to safeguard assets in the absence of the actual owner, the designated party gets powers to conduct financial transactions. read more would receive the sum insured in full and the regular bonus calculated on the sum insured, and the policy terminates.

The above discussed is one policy of Reliance Life Insurance Company. It not only helps the policyholder but also helps the insurance companies. The policyholder can regulate its cash flow through this policy as through this plan. The policyholder can get regular cash flows from its policy at regular intervals and use those per his needs. Also, from the regular premium, the company can cover its operating expenses and manage the available income cash flows in other investing opportunities.

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Cash Flow Plans Guidelines

There are hard and fast guidelines. But there are some standard guidelines, which, when followed, will help to get the best outcomes of a cash flow plan.

There needs to be a clear knowledge of the funds to be utilized while planning cash flows. In addition, there should be a proper understanding of the expenses incurred in the business. Finally, there should also be knowledge of future investment opportunities the business would require to grow. There are these three activities that businesses and individuals should be aware of, which are Operating ActivitiesOperating ActivitiesOperating activities generate the majority of the company's cash flows since they are directly linked to the company's core business activities such as sales, distribution, and production.read more, investing activities, and financing activities.

Importance

Cash flow plans are important for everyone to check their cash outflows on various expenses and to keep track of the cash inflows in the form of incomes generated during a period. Moreover, there is high importance in planning for future cash outflows and inflows. It is because any future investment decisions depend upon the funds available. If there is an opportunity, but funds are not available, then from where to borrow or raise funds, their cost, and every other thing involving cash transactions.

Cash Flow Plans vs Budgets

Plans and budgets are two different things. The plan involves tracking the progress on a monthly, quarterly, half-yearly, and annual basis. In contrast, the budgets involve records of the income and expenses on the same parameter on monthly, quarterly, half-yearly, and annually. Budgets are according to the plan. Therefore, plans are a wider term than budgets. Both plans and budgets can be short or long-term, but one will prepare the budgets to keep the business’s plans in mind.

Benefits

There are many benefits which are listed below:

  1. It helps to keep track of Business ExpensesBusiness ExpensesBusiness expenses are those incurred in order to successfully run, operate, and maintain a business. Travel & conveyance, salaries, rent, entertainment, telephone and internet expenses are all examples of business expenses.read more.
  2. Second, it helps to keep track of both cash inflows and outflows.
  3. Third, it helps to utilize the cash/funds optimally.
  4. Finally, they benefit both the companies and the customers as both benefits from this planning.

Limitations

Even though there are many benefits, there are many limitations also, which are below:

  • First, it only provides information related to cash inflow and outflow.
  • It does not give a clear picture of the business’s financial position.
  • There are no substitutes for business plans.
  • There can only be an estimation of cash requirements in this type of planning.

Conclusion

Cash flows are the plans for utilizing the available cash best for both the companies and the customers. Through these plans, the planner can identify their incomes and expenses, i.e., both inflows and outflows of cash, and implement the changes accordingly.

Recommended Articles

This article has been a guide to what Cash Flow Plans are. Here, we discuss an example, guidelines, and how a cash flow plan works, along with benefits and limitations. You can learn more about financing from the following articles: –

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