Skip to main content

Managing Cash Flows

Cash Flow Can Be Managed By Keeping Surplus In Banks Or Other Liquid Assets Like Fixed Deposits &Debt Funds

When we look at the average surpluses over a year, it does not show the monthly variations. For instance, the average surplus can be 25,000 on a month-on-month basis. But there could be a deficit of `74,000 in June and Rs 46,000 in October. If we only look at the average surplus figure, it will not give the correct picture on cash flows.

Cash flow management is the core of financial planning. It needs to addressed comprehensively, if the financial plan has to work.

Liquidity: The first principle in cash flow management is maintaining liquidity to the extent of approximately three months expenses. In certain cases, where the income flows are uneven, we may even suggest up to six months' salary or expenses as a liquidity margin. It is a good idea to keep this in the form of actual cash in the bank account, sweep-in deposits ( which is near-cash) or in debt mutual funds. This is maintained to ensure there is no problem even in case of disone is changing jobs, has medical conditions due to which one is on loss of pay and so on. Then, the liquidity margin will come in handy. This will be especially useful for people who have monthly instalments to clear, like a house loan, which need to be paid over and above the regular expenses.

Additional provision: It is always better to have liquidity over and above that provided by regular income sources. Additional sources are those which could be liquidated when the need be, like in bank fixed deposits. Investments in stocks and mutual funds (equity or debt) could also come handy, as they can be liquidated as and when required. Investments in Public Provident Fund, Employees Provident Fund, National Savings Certificate are illiquid as they come with a mandated lock-in period.

Contingencies: You would like to provide for unforeseen times. Like, for your aged mother's health requirements. Contingency is for unknown situations or emergencies, for holidays or guests, insurance premiums, and so on, in a particular month. When such expenses come up together, they disrupt surplus available. It is a good idea to be prepared and invested for appropriate tenures. Example: If holiday expenses are coming up in seven months, invest in a 180-day FMP and use the proceeds on maturity. If the amount is not available upfront for investment, you can accumulate it through a systematic investment plan (SIP) in a mutual fund scheme. Provisioning can also be done from maturing investments. For instance, investments maturing between now and the time required can be moved to a debt fund and be redeemed when required.

Handling investment inflows: Maturing investments need to be reinvested or put to use, as per your budget or upcoming expenses. It is important to have information regarding all the investments due to mature in the next one year. Plan for investing these amounts in the interim, after considering upcoming or sudden expenses. Ideally, chalk out which amounts are going to be invested, in what kind of products and how much needs to be consumed. Sometimes, the amount expected to be received may be big, like a annual bonus. Since the actual amount may not be known, having a rough investment plan would be needed. There could be investments or money from insurance that we would have redeemed in a particular month. Such inflows also need to be considered for deployment.

Managing improved inflows: There are points when the monthly cash flows would improve. For instance, you may get an increment in six months of approximately eight per cent, then the increased cash needs to be deployed. Decide the investment avenue in advance. For instance, an SIP or recurring deposit is recommended for parking this fund. Sometime, it may be used to augment the liquidity to the required level, if it was dipped into due to sudden rise in expenditure. Once this is done, revert to investments in SIP or recurring deposit.

Cash outflows contingent on inflows: When planning, we sometimes suggest individuals incur an expense which is contingent on an inflow. For instance, a foreign holiday may be suggested only if they receive a bonus of a certain amount. Or, consider renovating your house only on receiving a raise or a bonus. Apart from easing the cash flows, it also brings discipline and commits cash inflows for cherished goals, especially not very important ones.

While planning your cash flow, it is necessary to choose the appropriate investment options based on the end-use of that money. When planning this, apart from the tenure, the choice of investment instrument would also be based on the returns, risk, liquidity requirements and tax liability. Appropriate choices, here, would help in improving the returns. And at the same time, provide for smooth management of your finances. Financial planning itself and cash flow management in particular, are easy to understand and mostly intuitive. Thinking through the whole thing and executing these over time is the key to success. Just remember: God is in the details.

 

Popular posts from this blog

Am you Required to E-file Tax Return?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...

IDFC - Long term infrastructure bonds - Tranche 2

IDFC - Long term infrastructure bonds What are infrastructure bonds? In 2010, the government introduced a new section 80CCF under the Income Tax Act, 1961 (" Income Tax Act ") to provide for income tax deductions for subscription to long-term infrastructure bonds and pursuant to that the Central Board of Direct Taxes passed Notification No. 48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010. These long term infrastructure bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE of the Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings into infrastructure sector directly. Long term infrastructure Bonds by IDFC IDFC issued an earlier tranche of these long term infrastructure bonds on November 12, 2010. This is the second public issue of long-te...

Section 80CCD

Top SIP Funds Online   Income tax deduction under section 80CCD Under Income Tax, TaxPayers have the benefit of claiming several deductions. Out of the deduction avenues, Section 80CCD provides t axpayer deductions against investments made in specific sector s. Under Section 80CCD, an assessee is eligible to claim deductions against the contributions made to the National Pension Scheme or Atal Pension Yojana. Contributions made by an employer to National Pension Scheme are also eligible for deductions under the provisions of Section 80 CCD. In this article, we will take a look at the primary features of this section, the terms and conditions for claiming deductions, the eligibility to claim such deductions, and some of the commonly asked questions in this regard. There are two parts of Section 80CCD. Subsection 1 of this section refers to tax deductions for all assesses who are central government or state government employees, or self-employed or employed by any other employers. In...

ULIP Review: ProGrowth Super II

  If you are interested in a death cover that's just big enough, HDFC SL ProGrowth Super II is something worth a try. The beauty is it has something for everybody — you name the risk profile, the category is right up there. But do a SWOT analysis of the basket, and the gloss fades     HDFC SL ProGrowth Super II is a type-II unit-linked insurance plan ( ULIP ). Launched in September 2010, this is a small ticket-size scheme with multiple rider options and adequate death cover. It offers five investment options (funds) — one in each category of large-cap equity, mid-cap equity, balanced, debt and money market fund. COST STRUCTURE: ProGrowth Super II is reasonably priced, with the premium allocation charge lower than most others in the category. However, the scheme's mortality charge is almost 60% that of LIC mortality table for those investing early in life. This charge reduces with age. BENEFITS: Investors can choose a sum assured between 10-40 times the annualised premium...

Merger of Tata Indo-Global Infrastructure Fund with Tata Equity Opportunities Fund

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300 Merger of Tata Indo-Global Infrastructure Fund with Tata Equity Opportunities Fund Tata Mutual Fund has decided to merge Tata Indo-Global Infrastructure Fund with Tata Equity Opportunities Fund, with effect from January 16, 2015.   Investors of Tata Indo-Global Infrastructure Fund can redeem/ switch out units from December 13, 2014 to January 12, 2015 without paying any exit load. For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call Leave a missed Call on 94 8300 8300 Leave your comment with mail ID and we will answer them OR You can write back to us at PrajnaCapital [at] Gmail [dot] Com --------------------------------------------- Invest Mutual Funds Online Invest Any Mutual Fund Online Download Mutual Fund Application Forms from all AMCs Download Mutual Any Fund A...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now