For all you first time followers I recommend that you take a look at the introduction to this series HERE for a broader overview. In this post we will be discussing cash management and the aim is to provide you with the tools to be intentional with the use of your money. Unless you have a conscious idea of where every dollar is being spent you will not use your money to the best of its potential. Furthermore, cash management should be something done with your spouse or partner and should bring your together and not further apart. Proper cash flow management will assist a person and household in accumulating savings by forcing them to look at their finances and evaluate those areas they believe they could be more disciplined in. Given the complexity of this topic I will be breaking this down into several post including cash management, cash flow statement and savings strategies. Let us jump into how we can best look at cash management to provide the community with some tools related to this very important financial talent.
It is hard to gauge exactly what is the bad behavior or overspending in your budget if we do not have an accurate picture of the inflows and outflows of cash. We should focus on a time of greater than 1 year as a good the cash flow statement should show whether annual spending exceed annual savings. We will touch on a few ways in which you can improve your current cash flow below.
The first and most obvious and useful way to improve your cash flow situation is to increase your income side of the equation. By increasing your income, you are focusing your energy on bringing additional resources and taking personal accountability for your situation.
• The easiest way to increase your income to let your boss know that you are available to work extra hours to provide the business with more value. It would recommend you have and plan and quantified to your boss as much as possible just how the extra hours you work will equate to additional value to the company. This is not always easy, but nothing is lost by letting your boss know that you want to invest more in their company’s success.
• You could always negotiate a salary increase but this is generally more difficult as you must be able to demonstrate that the additional income you receive will motivate specific goal and outcomes that are profitable for the business. I would recommend that you start to work those projects in advance and have evidence that you could increase your value to the company and use this as leverage in a negotiation. The thing to remember here is that your boss has the ultimate negotiation position, and they may not be willing to make concession, and would rather replace you than meet your elevated demands.
• If your current employer is not willing to provide you with a raise in your current role and you believe that the free market could pay you more then you might want to consider looking for a higher paying job. This serves as leverage when negotiating a raise as the ultimate bargaining tool is being able to walk away from your current job without huge financial consequence to yourself.
• Lastly look to set up a new business or expand your existing business. You would be surprised how many independent contractors offer their services to multiple companies in the aim of maximizing their incomes and increase their tax efficiency. The more income streams that you can establish to supplement your income the more likely that any one event will not impact your cash flow management.
Secondly, if you would like to improve your cash flow you could look to minimize and diminish your expenses. This tends to be more painful for individuals and businesses as it requires fiscal fasting. Anything that can be cut to minimize your budget must be cut, and this can be a difficult intellectual exercise to undertake. One must first analyses current expenditures both fixed and flexible and cuts must be made where possible. Let’s look at both expense types and find some inefficiencies with the aim of increasing your cash flow.
Fixed expenditures must be budgeted and reduced over the longer term, and they do not offer the same cost reduction flexibility as flexible and discretionary expenses.
• You must be able to find inventive ways to cut your fixed home expenses. This can include renegotiating your mortgage rate with your mortgage provider if interest savings are greater than penalty charges to lock in a lower rate. Renegotiate your home insurance premiums with your provider who will generally reduce your premium if you install an alarm system or specific fire and theft early waring equipment. I can’t say this enough but turn off the lights when you are not in the room and you will save on your utility bill. My father used to remind me of this everyday and I thank him for this now as it has saved me money. Having automatic timers on your outside lights, and energy efficient bulb can all go a long way to reducing your utilities costs.
• You can also look to reduce as much as possible you fixed family expenditures. Shopping at lower end retail stores for clothes or only buying when retail stores offer sales incentives can save on average 10-30%. If you are eating a lot of expensive meats and dairy consider more fruits and vegetable which tend to be less expensive, but once again shop using store loyalty card and try to price match as often as possible and the saving will be immense.
• Insurance Premiums although they are fixed costs can be reduced in innovative ways. Try as much as possible to have all your insurances with the same provider as they will provide bundle incentives that can easily same substantial amounts of a single service price. For life insurance move from whole life to term insurance as this can save substantial amount over the long term. The main take away is shop around aggressively for comparative prices and will be pleasantly surprised of the untapped savings that were waiting for you all along.
Flexible expenses or discretionary spending might be easier to cut but may impact your standard of living or desired lifestyle. You can cut discretionary spending while you also increase your income using the above-mentioned strategies for maximum impact.
• You may need to reduce children’s education cost and other costs associated with continued training in your field of expertise. As much as you may believe private school is an entitlement for your children, I have seen many family budgets stretched to the brink of bankruptcy to maintain the appearance of prosperity. If over a one-year period your child must go to public school whilst you realign your budget and priorities, the impact for them will be minimum. You can further supplement their education with much cheaper tutoring and mentoring services which offer a much more comprehensive personalized education to your children.
• You can put off major purchases that are not required but rather simply a want. Having stainless steel in your kitchen, a 50-foot boat, a four-wheeler and an $200000.00 RV are not required. If you are in cash flow deficit you should be living on beans and rice and making due with the thing you have. This is easier said then done when you can reach into your pocket and pull out a credit card for the purchase, but more on that in our debt management section.
• You will have to look at taking cheaper vacations, not going out to eat as often and not spending as much on birthday and holiday gifts. Take last minute vacations to cheaper destinations to save on costs. Have a home date with a homemade meal instead of going out to an expensive restaurant. These sacrifices will greatly increase your cashflow and help you strike a balance between your inflows and outflows.
To conclude on my introduction to cash flow management, I think that the main point is that you must look at every aspect of your budget and be creative with the ways that you can increase income and cut expenses. In the next post we will look deeper at a cash flow statement to give the community some practical exposure to its real-life applications of a budget. Each person is unique in that they have their own obstacles and advantages in their financial lives as such this guide aims to provide exposure to this topic and is by no means an exhaustive guide on this topic. See you all in my next post.
