I have written a couple of posts on the concept of cashflow recently. We have looked at how important for companies to maintain a good cashflow management structure to ensure they do not run out of money especially during credit crunch period.
In this post, I am going a little personal and closer to what we are dealing with in our daily lives. We will look at the importance of cashflow management from a business entrepreneur and individual employees point of view.
According to research studies, only about 20% of business entrepreneurs bother to track their cashflow movement. Interestingly, 98% of these entrepreneurs are more concerned with their profitability and they pay closer attention to the sales and procurement activities more than anything else. As a result of this, we often see great businesses that are doing exceptionally well ended up under going concern in the end. And it's a shame to be honest.
There is no doubt that all companies ultimately depend on profitability to continue their operations. However, while profitability is at the center of the heart of the business, cashflow is the arteries and veins connecting blood to the business. In other words, while it is important for a company to maintain profitability, proper cashflow management ensures that the company is able to function operationally with the navigation of its working capital.
If you happen to have set up your own business or experience working in a finance department previously, you would know that companies usually struggle with their collection of receivables for customers that are under sales on credit, even if risk management checksteps have been taken. Without being able to collect these money, there will not be sufficient turnover to pay off the vendors on the other end. It is therefore critical that the Accounts Receivable (AR) and Accounts Payable (AP) are to be aligned and managed effectively. In fact, any businesses should place a considerable amount of effort in controlling cash management activities.
From employees point of view, we are often faced with managing our personal cashflow ourselves. If you are working for an organization as an employee, your cash-inflow would be relatively predictable in the form of salary at the end of the month. It will then be up to you on how you would manage this lump sum cash you received to pay off the multi-expenses you have to pay on your list.
Working in a finance department myself, I often get requests for salary advance from colleagues who interestingly belong in the top high end bracket. They are not your average type of colleagues whose salaries are bare minimum for them to get through the basic necessities. They are people flushed with cash and with their income could easily purchase almost any tangible things in the world. The strange thing you would ask is why these people are struggling with cashflow with the amount of salaries they earned?
December is a special month
For those who are working in organization that entitled you to a 13th month AWS, you may be feeling pretty excited this week as most companies are giving an advance December salary and AWS in view of the upcoming year end closing (for companies with 31 Dec financial year end).
I see so many excited faces of colleagues who are awaiting for this moment. But little did they realize that they have to wait a longer period for the next salary in Jan to come in. I expect many will struggle, just as I have experienced myself in the past. We get so used to monthly cashflow turnover that when these patterns are disrupted, all chaos will break loose. Now imagine a worse situation when your work are no longer safe and you are facing the possibility of retrenchment. Are you prepared for that to take place?
Now, it is often easy to imagine plans in the head but with little action. We often know that we are vulnerable for these things ourselves but fail to take the next piece of action. It is therefore important that you walk the talk to ensure that you plan well for these emergencies. There are things that I can think of which you can do to help navigate your cashflow:
1.) Increasing cashflow frequency
For most employees, our incoming cashflow is most likely once a month in the form of salary. The only way we can probably increase our frequency (and amount) is through other investment activities.
If you have not start investing,you may consider this option as it can provide you with additional income that compliments your monthly salary. Income generating asset classes such as Stocks, Bonds or Properties provides an alternative route for investors to yield additional income on top of the salaries figure they receive at the end of every month, mostly only fixated at their frustrations. Do note however that you don't lose your capital from your investment by chasing after ridicilous return offered. Always do your own due diligence prior to investing your money.
2.) Use last month income to pay for this month expenses
A couple of fellow bloggers, LP and Drizzt, talked about how you can utilize a budgeting exercise to use last month income to pay for this month expenses and conversely use this month income for next month expenses and so on. Budgeting and planning ahead would probably save you some serious trouble you can avoid at a later stage, so it would be prudent to use the income you already have in hand to dictate how much you should be spending on your expenses.
3.) Credit Card as an alternative
Credit card is a double edged sword. They can be extremely useful and beneficial if you know how to use them (by that I don’t mean swiping the card). By using them as an alternative to cash, you are delaying cash outflow into the future and that can save you some ample time to reorganize some of your cash if you are tight. Some people who are less prudent with money management will find this extremely difficult and may backfire in the end. But for those who are savy, credit card can be a very useful handy tool to use.
What about you? How do you deal with your cashflow issue?