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CFPN: Financial Analysis and Cash Flow Management

CFPN · Work through your exam, one topic at a time.

All guide sections

Financial Analysis and Cash Flow Management

Domain 2 tests whether you can build and interpret personal financial statements, calculate planning ratios, and apply time value of money to real goals. The exam favours calculations where the method matters as much as the answer.

Statements and ratios

  • Net worth statement: assets at fair market value minus liabilities. It is a snapshot, not a cash flow.
  • Cash flow statement: income minus expenses. Separate fixed from variable and committed from discretionary spending.
  • Savings ratio = savings / gross income; many planners target 10–20%. State whether you use gross or net income.
  • Emergency fund = liquid assets / monthly essential expenses; a common target is 3–6 months.
  • Debt-to-asset ratio = total debt / total assets; generally below 50%.
  • Housing ratio = monthly housing cost (principal, interest, taxes, insurance) / gross monthly income; often 28–30%.
  • Total debt service ratio = all debt payments / gross income; often 36–40%.

Time value of money

Use FV = PV(1 + r)^n. For regular savings, FV = PMT × [((1 + r)^n − 1) / r] for end-of-year payments. Convert nominal to real: real return ≈ (1 + nominal) / (1 + inflation) − 1. Match the payment frequency to the rate: a monthly rate is annual rate / 12 only for nominal rates.

Worked example

A client has gross income 600,000, taxes 90,000, living expenses 420,000, and savings 90,000. The savings ratio on gross income is 90,000 / 600,000 = 15%; on net income it is 90,000 / 510,000 = 17.6%. Emergency liquid funds are 120,000 and essential monthly expenses are 35,000, so the fund covers 3.4 months. Debt is 300,000 against assets of 800,000, a 37.5% debt-to-asset ratio. To accumulate 1,000,000 in 10 years at 6%, the annual end-of-year deposit is 1,000,000 / 13.1808 = 75,868, because the annuity factor is ((1.06)^10 − 1) / 0.06.

Traps

  • Mixing gross and net income in the same ratio.
  • Treating the whole mortgage payment as an expense; principal repayment reduces debt and is not pure consumption.
  • Using total expenses rather than essential expenses for the emergency fund.
  • Comparing a nominal return with an inflation-adjusted goal.
  • Double-counting an asset that is already pledged as collateral.