What Are Cash Flow Plans?
Cash flow plans, in insurance, are plans that allow policyholders to use their own cash flow to finance their insurance premiums. Cash flow plans can also refer to an insurance company's assessment of a company's cash flow, income streams, and expenses, along with a plan to coordinate the payment of insurance premiums. However, cash flow plans can also relate to documents a company puts together to track cash flow, both cash inflows and outflows, over a period.
- A cash flow plan can be viewed in an insurance context or a general context.
- In the insurance context, a cash flow plan allows an entity to pay its premium in small intervals based on incoming cash flow.
- Insurance cash flow plans benefit both the policyholder and the insurance company based on the increased ability of the policyholder to make payments.
- In a general sense, a cash flow plan allows a company to plan its incoming and outgoing cash to ensure it can meet expenses.
- Cash flow activities include operating activities, investing activities, and financing activities.
How Cash Flow Plans Work
Cash flow plans can provide financing for both policyholders and insurance companies by helping them make better use of their cash. Policyholders can earn more interest on cash reserves, and cash flow can even be generated by the policy itself, as commonly occurs with life insurance policies that have investing components. Insurers may get paid in installments, but their collection rate may go up because smaller, regular payments are more affordable.
Outside of the scope of insurance, a cash flow plan is a way by which a company can plan and manage the loss and gain of cash in order to ensure that the company is able to pay business-related expenses as they occur. Good cash flow management is key to ensuring any business runs smoothly. By matching the payment of expenses to projected incoming cash, they can use working capital more efficiently, by making payments as late as possible. Cash flow plans can help the business to earn interest on cash reserves, and maintain a liquidity cushion for unexpected expenses. They can also indicate whether operating cash flow is enough to make capital expenditures, or whether more capital will need to be raised.
The types of cash flow activities that are factored into a cash flow plan are as follows: operating activities, investing activities, and financing activities. Operating activities can include the cash made by the sale of goods or purchase of merchandise. Investing activities include long-term investments, property and equipment, and the principal of loans made to other entities. Financing activities are considered cash activities related to noncurrent liabilities and owner’s equity, such as the principal amount of long-term debts, stock sales and purchases, and dividend payments.
A solid cash flow plan is the best way to avoid having cash flow issues, which are often behind the early-demise of otherwise promising companies.
Example of a Cash Flow Plan
Assume that Company Z is a start-up company that is in the practice of producing web and phone applications. Company Z expects that it will sell 40 applications a month at a price of $5,000 each and that it will be paying cash expense totaling around $50,000 in certain months, and around $100,000 in other months. Company Z also anticipates that it will need to buy $75,000 of equipment in December.
Company Z would start the process of formulating a cash flow plan in order to ensure that it is capable of meeting the financial demands of these business-related expenses as they occur. Without a solid cash flow plan, Company Z runs the risk of being unable to meet these financial demands and could be forced either to raise capital quickly—which is often an expensive process, fire employees, or even cease operation of the company.