FINANCIAL management is comparing your actual inflows and outflows to your expectations or predictions (your budget), says the writer.     Pexels
FINANCIAL management is comparing your actual inflows and outflows to your expectations or predictions (your budget), says the writer. Pexels

Importance of drawing up a financial plan

By Willem Oberholzer Time of article published Jun 4, 2020

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As we come to terms with the current “new normal”, you have to plan for an uncertain future. As the saying goes, if you fail to plan, you plan to fail.

But where to start? If it sounds confusing and daunting, it is. If you have never worked with numbers, take some time to read this, and perhaps it will make some of the fundamentals understandable.

Financial planning is defined as understanding what your net worth is and what your cash flows are.

Your net worth is the cornerstone of your financial plan. To start with, you will have to compile a list of your assets. Your assets include the market value of your house and car, cash in the bank, and the value of your investments. Investments can consist of the current value of your retirement annuities and shares.

The next component is to add up your liabilities, or, in simple terms, what you owe banks, other people and institutions from which you borrowed money to purchase the assets you own.

The next step is to determine your cash flow. This entails determining how much money you are earning (in a year and in a month) and what you are spending this on.

Unless you draw up a list of cash inflows and outflows, you will not be able to determine how much money you have left over to invest or use to repay your liabilities sooner. Where will you start to determine where to cut back to ensure that your expenses do not exceed your income?

Financial management, in simple terms, is comparing your actual inflows and outflows to your expectations or predictions (your budget). It forces you to keep your expenses within the limits that you have set in the first instance.

Financial management is best done continuously - for example, daily, weekly or monthly. Any deviations will have an implication for the remaining periods in your planning cycle. You have to adjust your financial plan continuously. And that is what financial management is. If you were to think of financial management as driving a car, would you be safe and relaxed if you could not see the road and hold the steering wheel?

What has annoyed me is the fact that you give your information to professionals. You wait while they process the information in a “black box” and come up with a set of numbers that you have to take time to understand. Well, that was the past, and if anything has become clear in this time, it is that information has to be real time.

There are a number of accounting packages that are affordable and that provide you with real-time information that will allow you to manage your financial life and adjust your plans accordingly, quickly. Xero is a good example of this, or the best solution at the best price.

A word of caution: it does take time and effort to move you from the dark ages of non-cloud accounting to the reap the benefits of the information revolution. I spend a substantial amount of time and effort adjusting the financial plans for my business and those of my clients that have asked to move towards financial enlightenment of numbers in the clouds.

Please don’t fail to plan, and thus plan to fail. Make sure that you have your own financial plan. Your financial information should as accessible as a Teams or a Zoom call. You can adjust your financial plan quickly.

If you battle to find the solution, pick up a phone and call. It may be a lot quicker than writing up your budget on a piece of paper and waiting another month to see how much the reality differs from the plan.

Willem Oberholzer CA (SA), MCom (Tax) is a director of Probity Advisory and Kreston South Africa.

PERSONAL FINANCE 

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