Key Financial Analysis & Mathematical tools/concepts for financial planning

• Cash flow

• Time value of money

• Portfolio/Investment management

• Net worth.

Cash Flow

Cash flow projections are a key step in measuring the gap between where you want to be and where you are now. Tracking monthly cash flow is knowing how much money comes in and how much money goes out on a monthly basis.

There are four factors that will help you establish control over money;

• Income/Expense: Identify and isolate income and expenses. You will need to consider whether income is gross, or net (the amount you actually have available); if it is gross, you need to set aside an expense category for taxes.

• Category: Define the kinds of income you receive and the kinds of expenses you incur. Categorize them according to the fixed or flexible nature of the item.

• Time: Your system should be based on a monthly structure, and you should quantify your income and expense within a 12-month format.

• Amount: Income and expenses should be expressed. In short, your cash flow management system should examine all financial transactions over a year-long period, with income and expected expenses for each category broken down on a month-to-month basis. Included in those month-to month expenditures should be a portion for savings for both short-term and long-term needs. 

Time Value of Money

• Time value of money (TVM) implies that money received today is always worth more than money received at a later date. It is the basic concept in financial planning. Without this, there is no financial planning.

• In other words, money available at the present time is worth more than the same amount in the future due to its potential earning capacity. It is the central financial concept in personal finance. Let’s look at this concept from two perspectives below.