What is the Cash Flow Plan?
Cash flow plans are those plans where an insurance company assess its incomes and expenses for maintaining their cash flows and also to keep their cash flows above their expenses. It also refers to a plan of an individual to ensure cash liquidity in such a way that they manage theirs expenses as well as 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 financially to both policyholders and the insurance companies in many ways as the policyholder would be able to utilize its cash available in many other alternatives along with investing, and the insurance companies can use the premium amount paid by the policyholder for their 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.. A company, as well as policyholders, needs to 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. and plan according to the cash available for its expenses and spendings.
There are three major activities involved in this plan, which both the company as well as the individual need to concentrate on, which are 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.; 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.; 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.. Planning of all the above three is equally important information. Cash flow only works positively when there is proper planning for the utilization of the funds available and funds to be raised and investments to be made.
Examples of a Cash Flow Plan
Let’s have a real plan to discuss, which is the Reliance Cash flow plan. It is a money-back plan from the Reliance Life Insurance Company. Under this, the survivor would receive returns on his premiums at a pre-accepted percentage at the end of every 3rd year from the year the policy came into effect and till the maturity of the policy. However, if the life insurer 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. would receive the sum insured in full along with 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, through this policy, will be able to regulate its cash flow as through this plan, the policyholder will be able to get regular cash flows from its policy at regular interval and can use those as per his needs; also the company from the regular premium will be able to cover its operating expenses and manage the available income cash flows in other investing opportunities.
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.
While planning for cash flows their needs to be a clear knowledge of the funds to be utilized. There should be a proper understanding of the expenses to be incurred in the business, and there should also be knowledge of future investment opportunities which the business would require to grow in. There are these three activities which 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., Investing Activities, and Financing Activities.
Cash Flow Plans are important for everyone to keep a check on their Cash outflows on various expenses and to keep track of the cash inflows in the form of incomes generated during a period. Also, there is high importance to plan for the future cash outflows and inflows, such any future investment-related decision to be depended upon the funds available and in there is an opportunity but funds are not available then from where to borrow funds 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, whereas the budgets involve records of the income and expenses on the same parameter on monthly, quarterly, half-yearly, and annually. Budgets are made according to the plan. Therefore plans are a wider term then budgets. Both plans and budgets can be of short or long term, but the budgets will be prepared to keep in mind the plans of the business.
There are many benefits which are listed below:
- 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..
- It helps to keep track of both Cash Inflows and Outflows.
- It helps to utilize the cash/funds in an optimum manner.
- They are beneficial for both the companies and the customers as both obtain benefits from this planning.
Even though there are many benefits, there are many limitations also which are explained below:
- It only provides information related to cash inflow and outflow.
- It does not give a clear picture of the financial position of the business.
- There are not substitutes for Business plans.
- There can only be the estimation of Cash requirements in this type of planning.
Cash flows plans are the plans prepared for the utilization of the available cash in the best available manner for both the companies and the customers. Through these plans, the planner can identify both their incomes as well as expenses i.e., both inflows and outflows of cash, and implement the changes accordingly.
This has been a guide to what is Cash Flow Plans. Here we discuss an example, guidelines, and how does cash flow plan work along with benefits and limitations. You can learn more about financing from the following articles –