Budget and cash flow

As individuals when managing our budget and cash flow we follow the same rules and recommendations, which are usually followed by a company - obviously we follow these rules on a smaller scale; we must make sure that we have the right information so that we may take the right decisions.

Budget and cash flow

tag logo Budget and cash flow

1. Why is it important that we learn how to budget and that we actually monitor our budget?

Usually when someone decides to start budgeting or to monitor his income and expenditure, the first thing which comes to their mind is the following: how can I possibly foresee the future? This is no justification for not budgeting.

You can keep a budget no doubt. You can estimate what your income and your expenses will be. Probably, the first time you do it, the gap between the budget and the actual figures will be huge. This should not be a problem. You will manage to tap this gap only by starting to budget, and by monitoring your expenses.

So, why should a person budget?

Think about the future. When starting to budget, a person should try and analyse what are his/her expectations for the future - maybe there is a change in one’s job in the pipeline, or the thought of starting some different studies.

Thinking about the future - which are the expenses which most probably I will incur? Can I reduce them? Can I assume new commitments, together with those which I already have?
The balance between income and expenditure can show one of the following two scenarios - you may either end up with a surplus in cash or you might exceed your budget and over spend. However a person must be very honest and give true figures.
If a budget shows surplus of cash in the medium term, a person could start thinking about how to invest it. On the other hand, a person can just decide to book a holiday and spend the surplus cash in that way. However, one must be sure not to do such a thing before one actually has a confirmation of the present savings.
In the opposite situation, if projections show a lack of funds; one must seriously consider how to reduce expenses and, if that is not possible, to analyse the different ways to obtain more income.

2. How to budget?

As soon as one starts trying to budget lots of doubts will start cropping up. Here are a few tips:

Estimate carefully your income. Unfortunately very often this aspect of the budget is not fully in your control. Personal circumstances, economic crisis, etc; can affect the final income you receive;
Be sure to include all the important expenses. Review recent bank account statements to be sure the main items are included. Decisions taken will impact considerably on the expenses; these are usually easier to manage, especially short term commitments;
When budgeting, one must foresee when he/she will start producing an income and what expenses will be coming up. But this is not enough. One must also think about the cash flow - the timing is important. Think about when you are going to receive the income and when you are going to have to pay for the expense. Usually you have a time gap between these moments. Be sure this gap is taken into account. Make sure you have a contingency plan!

3. How to monitor one’s budget?

It is important to budget, but monitoring one’s budget is equally important. The budgeting process does not finish in the moment when we actually start keeping one. It is a continuous process that should give us the right information to allow us to take the right decisions about our finances.

Usually monitoring one’s budget on a monthly basis is recommended: a more frequent monitoring could involve plenty of work which is not necessary - on the other hand, not monitoring at all or sporadic monitoring could eventually lead to a bad financial situation and perhaps one which is difficult to resolve.

One should also compare his/her budget with the actual figures, checking income and expenditure. Throughout this exercise, the most important tasks are the following:

Analyse the reasons for the differences between what was estimated and what has happened. Was it a bad budget? Did we miss some expense or a key issue to consider in our budget? Has something changed in the last few months?
Learn from this monitoring exercise. We should update our budget based on the lessons learnt from this monitoring exercise - we should learn to make our budget more clear, objective and realistic. We will manage our finances better only by doing this - no doubt about it.

Glossary

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