You’ve heard it a million times – cash flow can make or break a business. The same can be said of your personal finances. Without adequate cash flow, you may not be able to pay your bills, do the things that bring you the most joy and satisfaction, or reach important financial goals you’ve set.

So… what is cash flow planning? Cash flow planning is tracking and projecting your cash inflows from wages, self employment income, investments and other income, and comparing to your cash outflows (bills, loan payments, taxes, etc.). The difference between the two is your net cash flow.

Why is cash flow planning so important? Cash flow planning may mean the difference between achieving financial goals or not, whether they are saving for a down payment on a new house, putting your children through college, or retiring early. Careful cash flow planning can help you make smarter decisions with your money, and can also help you identify problems down the road and fix them before they occur.

The first step in planning your cash flow is knowing where you spend your money! What’s the best way to track your spending? Use pen & paper, spreadsheets or a software program. The best method for you is the method that you will actually use on a regular basis.

Project your spending for at least 12 months so that you include annual and other infrequent expenses. Update your cash flow plan at least monthly. If you are experiencing a cash flow crisis, track and project your cash flow on a weekly basis instead of monthly.

Create best and worst case scenarios and create appropriate responses to both scenarios. For example, if your best case scenario is an increase in income by 50%, how will you use the extra cash? Will you put the additional income in your retirement plan or spend it on other financial goals? If your worst case scenario is a drop in income by 50%, how will you continue to cover your monthly expenses? By planning for the best and worst case scenarios, you’ll be ready for any situation. When estimating income, use conservative estimates if your income fluctuates from month to month.

Prioritize your financial goals and determine how much you’ll need to reach those goals. Whether you’re saving for a new car or for your retirement, you’ll be much more likely to achieve your goals if you know where you are going.

Create “rainy day” and “emergency” funds. Rainy day funds are for infrequent or unusual expenses (car insurance, annual vacation, home improvements). Emergency funds are for short periods of unemployment, unexpected medical expenses and other large expenses you weren’t counting on. Having money set aside for emergencies or other unexpected expenses will help make sure your financial dreams aren’t derailed.

Watch your spending. Focus on your goals and the value that each purchase brings to you. Avoid lavish spending if it means reaching your goals sooner.

Finally, update your cash flow regularly. Monitor your spending and re-evaluate your goals periodically. Remember, whether you are a business or an individual, cash flow planning can make the difference between success and failure.