Very often, when people talk about wealth creation and preservation, they tend to focus on wise investments and good portfolio management. These are certainly at the heart of wealth preservation, but there is another, equally important facet of financial planning that is sometimes overlooked: cash flow management. It may not be as interesting, for some, as devising investment strategies, but anybody looking to maintain their assets cannot afford to leave cash flow planning out of their wealth management practices.

The Foundations of Strategic Cash Flow Management

Why is cash flow management so important when it comes to preserving wealth? There are four primary reasons why you need to keep careful control over your cash flow if you plan to maintain and increase your wealth.

  • Tax efficiency: If you understand, plan, and control your cash flow, you will be in a better position to optimize your tax planning and minimize your liabilities. You can time your income and expenditure strategically so you pay less in taxes and keep more of your wealth. For example, if you are employed, you may be able to defer a bonus or stock grant to the next tax year, meaning you will not have to factor it into your tax calculations for the current year. If you own an incorporated business, you have a greater degree of control over your cash flow, with multiple ways to pay yourself or defer personal income by retaining earnings in the corporation.
  • Sustaining your wealth: The main benefit of cash flow management is that it helps you ensure that you always have sufficient resources to cover your daily expenses, pay for unforeseen expenditures and have enough set aside for occasional luxury purchases – without having to deplete your wealth by digging into savings and investments. Most importantly, the careful balancing of income and spending can help you keep both under control, particularly when the ratios between the two go through any significant changes.
  • Investment opportunities: When you manage your cash carefully, you can ensure that you have sufficient liquidity to take advantage of great investment opportunities when they arise.
  • Unexpected expenses: Good cash flow management can also help you maintain decent cash reserves so you can cover emergency expenses when necessary.

The core elements of cash flow management are:

  • Cash flow forecasting
  • Balancing income and expenditures
  • Careful, real-time monitoring of both inflows and outflows of cash
  • Monitoring and replenishing reserves
  • Managing liabilities

Strategies to Improve Liquidity While Preserving Wealth

There are several different approaches that investors and wealth managers can take to cash flow management. Some of the key strategies are equity compensation management, deferred compensation, and cash balance plans.

Equity compensation management involves careful planning of the sale of compensation options such as restricted stock units (RSUs) and employee stock options plans (ESOPs). You can time the sale of these in line with plans for major expenses or reinvestment opportunities.

Deferred compensation planning refers to a variety of tactics that can be used to reduce your current tax liability and enjoy future tax advantages. Essentially, you would defer a certain portion of your income so that you remain in a lower tax bracket, and thus reduce your liability.

Cash balance plans allow substantial pretax contributions with long-term benefits. As a business owner, you could contribute to a cash balance plan, you can reduce your current taxable income, move to a lower tax bracket and increase your cash flow.

The Role of Budgeting in Long-Term Wealth Preservation

It goes without saying that budgeting is an important part of cash flow management. However, although budgeting and cash flow planning are terms that are often used interchangeably, they are actually different concepts. Budgeting involves setting limits for spending in a certain period – a week, a month, or a year, for example. Cash flow planning is a much broader strategy. It entails the analysis and planning of both income and expenditure. This may include budgeting, but it is primarily focused on creating a plan of action to manage your wealth effectively, rather than ensuring that spending remains within certain preset parameters.

Especially for high-net-worth individuals, (HNWI), effective cash flow management is best achieved with the help of a professional wealth manager. Momentum Wealth of Aligned Capital Partners Inc. is a boutique financial management firm based in Georgetown, ON. We are here to help our clients with their financial planning, including cash flow management. We provide excellent wealth management strategies for individuals and families. Contact us for more information.