What Are Cash Flow Plans?
Cash flow plans, in insurance, are plans that 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, and expense projections, as well as premium payments. However, cash flow plans can also be related to documents that a company compiles to track both cash flows and cash inflows and outflows over a period of time.
Key Points
A cash flow plan can be viewed in an insurance or general context.
In the context of insurance, a cash flow plan allows an entity to pay its premiums over small time periods based on future cash flows.
Insurance cash flow plans benefit the policyholder and the insurance company on the basis of increasing the policyholder's ability to pay.
In general, a cash flow plan 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 both policyholders and insurers make better use of 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 that have investment components. Insurers may be paid in installments, but their recovery rates may increase because smaller regular payments are more affordable.
Outside of insurance, a cash flow plan is a way in which a company can 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 key 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 whether 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 of merchandise or the 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
Let's say Company Z is a startup that develops web and mobile applications. Company Z expects to sell 40 orders per month at a cost of $5,000 each and incur cash expenses of about $50,000 in some months and about $100,000 in other months. Company Z also estimates that it will need to purchase $75,000 worth of supplies in December.
Company Z will begin the process of 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 runs the risk of not being able to meet these financial requirements and may have to either immediately raise capital—an often costly process, with employees separating or even shutting down the company.
