PLANNING

WITH PERSONAL
FINANCIAL STATEMENTS

CHAPTER 2
THE OBJECTIVES OF THIS CHAPTER ARE
TO:
• Explain how to create your personal cash flow
statement.
• Identify the factors that affect your cash flows.
• Describe how to forecast your cash flows.
• Explain how to create your personal balance sheet.
• Explain how your personal financial statements fit
within your financial plan.
PERSONAL CASH FLOW STATEMENT
• A Financial Statement that measures a person’s cash
inflows and cash outflows.
• This is to evaluate the personal financial statement.
CASH INFLOWS:
- Money you earned.
CASH OUTFLOWS:
- Money you spend.
CREATING A PERSONAL CASH FLOW
STATEMENT:

• You can create a personal cash flow statement by

recording how you received cash and how you used
cash for expenses over a given period.
• Net Cash Flows = Cash Inflows – Cash Outflows
FACTORS AFFECTING CASH FLOWS

• Factors Affecting Cash

Inflows:
1. Stage in your career path
- The stage you have reached
in your career path influenced
cash flows because it affects
your income level.
FACTORS AFFECTING CASH FLOWS

• Factors Affecting Cash Inflows:

2. Type of Job
- Income also varies by job type. Jobs that require specialized
skills tend to pay much higher salaries than those that require
skills that can be obtained very quickly and easily.
3. Number of Income Earner in your Household
- If you are the sole income earner, your household’s cash inflows
will typically be less than if there is a second income earner.
FACTORS AFFECTING CASH FLOWS

• Factors Affecting Cash Outflows:

1. Size of Family
- Food, Clothing, School Tuition
2. Age
- As people gets older, they tend to spend more money on
expensive things.
FACTORS AFFECTING CASH FLOWS

• Factors Affecting Cash Outflows:

3. Personal Consumption Behavior
- Some consumer spend excessively to achieved immediate
satisfaction.
- You can assess your spending behavior by measuring the
proportion of your cash outflows over a recent period for each
purpose. You can also determine the proportion of your income
that is spent on each category so that you can assess where most
of your money spent.
FORECASTING YOUR CASH
FLOWS
• The next step in budgeting process in an extension of the
personal cash flow statement. A budget is a cash flow statement
that is based on anticipated cash flows for a future period.
Anticipating Cash Shortages
- Small shortages can usually be made up from your checking
account or an emergency fund.
- Budgets provide warnings of shortages so that you can prepare
for them.
FORECASTING YOUR CASH
FLOWS
Assessing the Accuracy of the Budget
- Compare the actual cash flows over a recent period to the forecasted
cash flows in your budget and take any necessary steps to improve
your cash flow.
Forecasting Net Cash Flows over Several Months
- You can use the same approach as for forecasting one month ahead to
forecast your cash flows for numerous months ahead. When certain
sorts of cash flows are predicted to be typical, they can be forecasted
using data from previous months with normal levels.
FORECASTING YOUR CASH FLOWS

Creating an Annual Budget

- You can extend your budget out for longer periods if you want to
see how much money you can save in the coming year. Create an
annual budget first, then adjust it to account for expected big
fluctuations in your cash flow.
Improving the Budget
- You should discover the components of your budget that you may
adjust to improve your budget over time in order to boost your
savings or pay down more debt so that you can more easily reach
your financial goals.
PERSONAL BALANCE SHEET
• The next step in the budgeting process is to create a personal
balance sheet. The personal balance sheet summarizes your
assets ,liabilities and your net worth.
ASSETS
- The assets in balance sheet can be classified as liquid assets,
Household assets and investments.
PERSONAL BALANCE SHEET

ASSETS
• Liquid Assets
- Are financial assets that can be easily sold without a loss in
value.
• Household Assets
- It include items normally owned by a household.
• Investments
- Some of the more common investments are in bonds , stocks,
and rental property.
PERSONAL BALANCE SHEET
LIABILITIES
- Liabilities represent debt and can be segmented into current
liabilities and long-term liabilities.
• Current Liabilities
- Are debt that you will pay off in the near future(within a year).
• Long term Liabilities
- Are debt that will be paid over a period beyond one year.
PERSONAL BALANCE SHEET

NET WORTH
- Your net worth can tell you many things. If the figure is negative,
it means you owe more than you own. If the number is positive,
you own more than you owe. The value of assets held by a person
or company, minus their liabilities is the net worth.
- For example, if your assets equal P100,000 and your liabilities
are P50,000, you will have a positive net worth of P50,000
(100,000 - 50,000 = 50,000)
PERSONAL BALANCE SHEET
CREATING A PERSONAL BALANCE SHEET
- You should create a personal balance sheet to determine your
net worth. Update it to monitor how your wealth changes over
time.
CHANGES IN THE PERSONAL BALANCE SHEET
- As you invest in assets, your personal balance sheet will change.
In some cases, such as when you purchase a home, your assets
increase while at the same time your liabilities may increase. Your
net worth will not grow unless the value of your assets exceeds
the increase in your liabilities.
PERSONAL BALANCE SHEET

HOW CASH FLOWS AFFECT THE PERSONAL

BALANCE SHEET
- In this topic it explains how can you increase your net worth
over time. If you invest your income in assets or to pay your debt,
the more money you will accumulate.
PERSONAL BALANCE SHEET

IMPACT OF THE
ECONOMY
ON THE
PERSONAL
BALANCE SHEET
PERSONAL BALANCE SHEET
ANALYSIS OF THE PERSONAL BALANCE SHEET
- In analyzing your personal balance sheet you can monitor the level
of liquidity, the debt you own, and your ability to save money.
• Liquidity
- ability to pay current obligation.
• Debt Level
- scale or ratio of how much money you owe.
• Savings Rate
- defined at the fraction of income that is not consumed or amount
of income saved rather than spent by people.
HOW BUDGETING INFLUENCES
YOUR FINANCIAL PLAN
• The key budgeting decisions for buiding your financial plan are:
- How can I improve my net cash flows in the near future?
- How can I improve my net cash flows in the distant future?
• These decisions influence all aspects of your financial plan,
including your liquidity, personal financing, protection of
wealth, personal investing, and retirement and estate planning.