There is little debate concerning the role of personal financial statements in the financial planning process. Gathering information about a client such as needs, objectives, resources, expenditures, attitudes and constraints along with the creation of personal financial statements is indispensable in financial planning.
Personal financial statements allow for evaluation of someone’s specific situation in order to identify appropriate ways to achieve their objectives.
The two personal financial statements used are Statement of Financial Position and Cash Flow Statement. These two statements communicate information that provides the foundation for well-conceived financial plans. Most planners agree that an annual statement is most useful and corresponds most accurately with a client’s tax records.
The good news is that the planner is in the best position to generate these statements for their clients after they have gathered information from their client. The creation of these statements by a planner allows the client to concentrate on other important aspects of the planner-client engagement such as conveying their goals, needs and concerns. Providing the required information and collecting the corresponding statements to back-up the information for the planner to prepared personal financial statements is the responsibility of the client. Hopefully this is not too difficult.
The Statement of Financial Position
A planner needs to have a clear picture of a client’s financial assets and liabilities. The Statement of Financial Position is where this comes together so that the planner can analyze the client’s current situation. Similar to a business’s Balance Sheet once created this document will provide information on Assets, Liabilities and Net worth.
From this information a planner can see what is owned, what is owed and what the net worth is on a specific date and time. This document changes over time and can significantly change as things evolve. Most planners use software to help them and their clients track these changes making it simpler to manage and make decision from the analysis of the information on it.
Example: Statement of Financial Position.
Cash Flow Statement
Whereas the Statement of Financial Position indicates what is owned, what is owed and net worth at a given point in time, the Cash Flow Statement summarizes a client’s cash inflows and outflows over a specific period of time, usually one year. This summarization reveals what cash flows the client experienced and helps establish patterns of spending, saving and investing. Keep in mind that this statement can be prepared on a monthly basis, quarterly basis or yearly basis. Breaking it up into smaller time increments other than one year can help planner and client understand timing of cash inflows and outflows. This can be important when ascertaining financing decision, investment decisions and spending needs. Lastly projections (pro forma) cash flow statements is another planning tool that projects anticipated inflows and outflows for a future period in order to help make important financial decisions.
Example: Cash Flow Statement