A cash flow statement is critical to understand a client's financial circumstances. Budgeting takes the process one step further in that the client decides how much money can be spent on certain expenses. The actual expenses are measured against this specified amount in order to determine whether the household is overspending or not. By doing a cash flow statement and a budget (if it has not already been done), the financial planner will have a better understanding of the funds available to implement recommendations made in the financial plan, as well as being able to identify areas of overspending. It is of no benefit to the client or the financial planner to develop a detailed financial plan, only to discover that the client has no available cash to implement it!

The budget is the cornerstone to any financial planning. By doing a budget initially, the client immediately gains control and understanding of his or her financial affairs.

Importance of a Budget

By carrying out the exercise of preparing a budget, a client is in a position to plan for current needs and make provision for the future. They can set realistic objectives and plan accordingly. Once a budgeting exercise has been completed, the client is more conscious of what is spent and how it is spent as very often clients do not realise how much is spent on a day-to-day basis.

A budget is usually based on personal assumptions and the success of the exercise depends on the accuracy of the data. Very often clients are loath to carry out the exercise as budgets require considerable effort to draw up. Although a budget does not provide solutions to financial problems, it can act as a guideline as to where the client is overspending and how this can be rectified.

The benefits of doing a budgeting exercise are:

  • It assists in the process of accurate and effective financial planning.
  • It assists wit identification of where money is being spent and how expenses can be controlled.
  • It identifies problems at an early stage.
  • It identifies available financial resources.
  • It assists with identifying priorities and ensures that they are met according to their level of importance.
  • It assists with developing a sense of financial responsibility.

There are a number of factors that affect the management and success of a budget for a client. These are the following:


Each member of a family should be involved in preparing and monitoring the budget. The budget should have the support and buy-in of all the family members in order for it to be successful. Each family member should be aware of his or her responsibility in managing the household finances. Where a discrepancy between the budget and the actual situation occurs, the following questions may be asked:

  • Why did it occur?
  • Who or what was responsible for the discrepancy?
  • What can be done to prevent the discrepancy from reoccurring?
  • What can be done to correct it?
  • What preventative measures have been put in place?

Authority and responsibility

Clear guidelines must be set as to who makes the final decisions. Each family member must be responsible for his or her actions. The person responsible for the household finances must co-ordinate the process to ensure every member participates fully.

Record-keeping and administration

A proper filing system must be created and one person must be made responsible for managing this process. A proper administration system makes it easier to manage and control the budget, as information is readily available.


It is important that family members communicate objectives to each other to ensure these objectives are realistic and are met, as set out in the initial plan. It is important that family members communicate on a regular basis to ensure that the budget objectives are kept on track.

Realistic expectations

It is imperative that the budget is set according to realistic expectations and that all variables are taken into account. Some identified areas that could lead to an unrealistic budget are that:

  • Budget figures are either too optimistic or too conservative.
  • Income and expenditure are estimated incorrectly.
  • Inappropriate time-frames are allocated.

Planning and time-frames

It is important to set clear time-frames as to when the objectives should be met. Monthly timetables must be set up as to what must be paid, by when and by whom so as to ensure that accounts are paid timeously. The following time-frames are usually distinguished:

  • Immediate 0 � 1 month
  • Short-term 1 � 3 months
  • Medium-term 3 months to 2 years
  • Long-term more than 2 years.


As circumstances change, flexibility is crucial in managing a budget. Any major changes should result in the budget being reconsidered. Even when no major changes have occurred, the budget should be reviewed on a regular basis.

Human behavior

The complexities of the family and the individual family members must always be taken into account. Each family member has different characteristics and each individual sees his or her objectives as the most important. Change will be resisted and the process must be managed properly, with due care and consideration.

Following through

The last point that needs to be emphasised is that it is important to always follow up and make sure the process is on track. Although it may seem like a major undertaking for a client, once the initial process has been competed, it is much easier to manage.