Wednesday, December 10, 2014

Are you having trouble with your own cashflow?

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.
Business Entrepreneurs
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?


  1. Hi B,

    To clarify, I don't really use budget. I see it as a means to forecast my future expenses only, so it's not a number that is fixed in stone. I don't use budget to restrict my spending, but rather I use budget to forecast future spending. Not sure if I make sense, so I'll give examples. When I started tracking my expenses, I've no idea what my food expenses are. So i guesstimate a number and use it for planning purpose (I need my expenses to know realistically how much I should earn to save xyz amt). After one year, when I have actual data of my food expenses, I'll adjust the initial budget and refine it to make it more realistic, again for future forecast.

    Repeat this for a number of categories and a number of years, you'll realise that not a lot of things surprise me anymore. There's less unexpected one-off expenditures because I would already have factored in. I started with YNAB (the budgeting software) last year, so it made it so much easier to do this. But why do I want so much accuracy in my forecast by budgeting? I want to reduce the amt of emergency cash I hold. With more certainty in my expenses supported by evidence, I don't need to hold that much emergency cash. Typically I hold about 3-4 months only. It's not that I know everything, it's just that the definition of emergency is more stringent because a lot of events are already expected and therefore budgeted.

    As a self employed, I would have to be more serious with planning my cashflow, because my month to month variation in income can be quite high. If for a particular month my expenses exceed my income, then the cash would have to come from the savings from months where there's excess. I'm thinking how easy all these would be if I've a fixed pay haha!

    1. Hi LP

      Thanks for correcting.

      You are one of our example here in the local blogosphere who are under the entrepreneur category with variable income every month.

      I can see why you are taking it much seriously than any others. Your income is more unpredictable so you are trying to forecast your expenses more closely to prevent unexpected costs along the way. Good way there to reduce the emergency savings in your case since you track them really close.

      I think if you had a fixed pay, then you would fall under the fallacy of most of the employees out there, unless recession struck that's when everyone really notices and wakes up.

  2. Hi B,

    Seems like im the number 1 increasing the frequency and quantity of income.

    I do not have a cashflow problem now maybe yet to have...

    1. Hi jfree

      Though you are still single, good to know that you don't have cashflow problem like most of the teenagers did.

      It's definitely a good start, you found your way out really early :)

  3. I spent last year bonus and has been doing it for years since AFC.

  4. Hi B,

    Call me a freak, but I track every single expense, right down to the bus fare I pay everyday.

    I find comfort in knowing with clarity how much I require for each type of expense. My record also tells me whether I had overspent in a particular month and will need to do some belt tightening.

    Like many others, I look forward to month end when the salary comes in. But my motivation is that I can apportion some money to add to my investment capital. :P

    1. Hi SRSI

      I really admire you guys who can track every single expenses to the core. I wanted to do that but always fail to do it. However, I do get a sense of how much each category of expenses is.

      I look forward to my monthly salary as well as I can put this into further investment at the end of the day. Same happiness different objective :)

  5. Hi B,

    This problem never comes to my mind. I only know that I need to transfer X amount every month on my payday to my untouchable/investment account. The rest I just spend. I didn't track any expenses because i know I will never able to spend the "rest" of amount in the same month due to my kiam sap spending habit. When bonus comes, everything just goes untouchable/investment.

    In short, I am just plain too lazy to track expenses and life is short and I don't want to count until like that.

    Lazy me! :(

    1. Hi OT83

      It's interesting to know that you are a complete opposite of SRSI above.

      I understand where you are coming from because I am almost half half with you and SRSI. The key to this is as long we know what we are doing and the method works for us, it doesn't really matter if we keep a close track of every single expenses.

      The habit is there, you will do just fine with your cashflow :)

  6. Hi B,

    Using credit cards as a cashflow management tool is very dangerous. Think the "savings" would be more than wiped out if the bill is rolled over, which is very likely if one is using it to tide over some cashflow issue.

    I still prefer to use cash especially when the stores give me a rebate when I do that. Otherwise, most of the prudent folks I know use credit cards for the cash back or to clock points.

    1. Hi 15hww

      You are right.

      If the person is having cash flow issue, then most likely the credit card debt will roll over causing a harmful cycle into the future.

      Cash is still the most prudent case and folks usually use that to get reward points more than anything else.

  7. Hi B, I always make sure that I set aside money for investment above all things. This is why I have set up a pre-authorized payment from my bank where a certain amount of money is transferred each week into my direct investment account.

    Also, using your credit card can also allow you to collect rewards. This is why I never use debit anymore : )

    1. Hi Jeff

      Some people pay money to themselves for investment first while some pay themselves last. To be honest I do not know which is the better option as both seems feasible if you are a prudent guy to begin with. For me I like to pay myself last because I want to ensure all my expenses are paid for before I hv leftover money for investment. Quite ironic.

  8. Hi B,

    I'm pretty similar as OT83. I don't keep track of every single expenses in some excel spreadsheet like some people do, but I do know what are the usual monthly expenses and one off expenses for that month

    On payday, its like CPF deduction. I find this the most effective. A certain amount after deducting the usual monthly expenses, one off expenses and some discretionary spending budget (this is to keep my state of mind healthy) will be transferred to another bank account.

    I do use the credit card for convenience's sake. I pay off the bill when I received the statement. I don't really like to use GIRO. I don't like instalments; be it paying upfront fee or interests every month. I pay insurance premiums yearly.


    1. Hi MS

      Looks like you me and OT83 are in the same group of gang who doesnt really track expenses to the detail.

      As far as paying ourselves first I adopt the same methodology as you. I make sure all expenses and debts are cleared before I use the leftover money for my investment. Work incredibly well for me so far so I think I will continue doing that.

  9. i recall having a friendly chat with an ocbc staff who related that he was shocked when his manager asked for overdraft for himself.sure. must be earning a lot as manager but also must be in cashflow trpuble despite working in a financial institutin himself.

    1. Hi Paul

      Its shocking isnt it when your boss ask you to process his salary advance or overdraft. Either he is poor in his cashflow or he must got really tight with his pants.

  10. 30 years ago, my primitive way of cash flow control is to allocate the amount for each expense in the envelopes.
    For marketing I will divide the amount to 30 days and I made sure each day will not exceed daily amount allocated.
    Back then we have to raise two kids with our meagre salaries.
    I used excel spreadsheet to keep track of my monthly expenses and I still maintain it till now though my children are already grown up and are now working.
    I love to use credit cards for all my expenses because I can receive cashbacks.
    On the average I receive about $60 cashback every month.
    I don’t spend what I don’t have. I pay all my credit cards on time.

    While I am successful in managing my cash flows I did not do well in my investment.
    I only invested what I can afford to ‘contribute to the market’ so I do not lose sleep if market crash.
    I am proud to say I am debt free.

    1. Hi Anonymous

      Thanks for sharing on your experience.

      You have provided a good sharing on what has evolved from 30 years ago to now but the practice remains the same till today.

      No one can say which is right or wrong but we know how we can react to each circumstance better than others. Always trust ourselves, we review them ourselves.

    2. hi anonymous, care to share how u cld hv done better in ur investments so that we can learn?