What Are Cash Flow Plans?
In insurance, cash flow plans allow policyholders to use their cash flow to finance their insurance premiums. Cash flow plans can also refer to an insurance company's plan for coordinating cash flows, revenue streams, expense projections, and premium payments. However, they can also be related to documents that a company compiles to track cash flows and cash inflows and outflows over time.
Key Points
A cash flow plan can be viewed in an insurance or general context.
In insurance, a cash flow plan allows an entity to pay its premiums over small periods based on future cash flows.
Insurance cash flow plans benefit the policyholder and the insurance company by increasing the policyholder's ability to pay.
A cash flow plan generally allows a company to plan its cash inflows and outflows to ensure it can cover expenses.
Cash flow activities include operating, investing, and financing activities.
How Do Cash Flow Plans Work?
Cash flow plans can provide financing by helping policyholders and insurers better use their money. Policyholders can earn higher interest on cash deposits, and cash flow can also be generated by the policy itself, as is often the case with life insurance policies with investment components. Insurers may be paid in instalments, but their recovery rates may increase because smaller regular payments are more affordable.
Outside of insurance, a cash flow plan is a way to plan and manage cash flow losses and gains to ensure the company can pay business-related expenses. It's worth it. Good cash flow management is critical to ensuring that any business runs smoothly. By matching expense payments to expected cash flows, they can use working capital more efficiently by making payments as soon as possible. Cash flow plans can help businesses earn interest on cash reserves and maintain a liquidity cushion to cover unexpected expenses. It can also indicate whether operating cash flow is sufficient to cover capital expenditures or more capital is needed.
Special Considerations
The types of cash flow activities included in a cash flow plan are operating activities, investing activities, and financing activities. Operating activities may include cash received from the sale or purchase of merchandise. Investing activities include long-term investments, property and equipment, and a major portion of loans to other entities. Financing activities are monetary activities related to non-current liabilities and equity, such as the principal amount of long-term debt, buying and selling stocks, and paying dividends.
Important:
A solid cash flow plan is the best way to avoid cash flow problems, which are often behind the early demise of promising companies.
Example of a Cash Flow Plan
Company Z is a startup that develops web and mobile applications. Company Z expects to sell 40 orders per month for $5,000 each and incur cash expenses of about $50,000 in some months and about $100,000 in others. Company Z also estimates it will need to purchase $75,000 of supplies in December.
Company Z will begin creating a cash flow plan to ensure it can meet the financial needs of these business-related expenses. Without a solid cash flow plan, Company Z risks not being able to meet these financial requirements and may have to immediately raise capital—an often costly process, with employees separating or even shutting down the company.
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