Cash management is crucial for all businesses; from startups to Fortune 100 companies. But cash management is also critical for individuals.
As financial planners, we have seen all sorts of cash management situations. We’ve sat through terrific meetings only to find a train wreck buried in the numbers.
What interested me in writing about cash management was an article written by @FredWilson on his excellent blog, avc.com.
Fred quoted Alan Shugart, the founder of Seagate Technologies (disk drives). Shugart famously stated, “It is important to remember when starting and growing a new company that cash is more important than your mother.”
I learned a long time ago you can identify many problems with a company, and many financial problems with individuals, by studying their balance sheet and their cash flow. Problems may begin and end right there, saving lots of tears and tissues.
And once our dear readers get the hang of it, you can accomplish the same thing. It’s not rocket science, but it does take time and persistence. And it requires truthful information. But we’ll save that for another time.
Cash Management Does Not Need to be Complicated
I sit on a few boards of local organizations. Most of these businesses are nonprofit organizations. In each case, I’ve found myself reminding board members, nonprofit does not mean “no profit.”
Because an organization is nonprofit, it does not get a free pass on examining cash management. Board members and finance committee members need to be very diligent about isolating leaks and examining trend reports.
It doesn’t matter if we’re examining the cash flow of a large company, a small nonprofit, or your own personal situation. Numbers are numbers and the facts don’t lie.
Isolating leaks implies there is a budget in place. The budget needs to be realistic. Building a realistic budget for individuals can be difficult. That’s primarily because individuals tend to “personalize” the numbers. At Mullooly Asset, we stress over and over for folks to “simply give us the data.” We can build the cash flow projections and balance sheet for you.
But we will still meet folks who aren’t straight-up with us, and we know it. Many of those individuals are simply passing through. They’re not serious. That’s often because they’re not ready to face the truth behind their own numbers.
Hopefully, someday they will be ready to face facts.
Building a budget can be easier than you think. If you have not built a budget before, begin with the previous twelve months of revenues and expenses.
We remind folks all the time, we do not care what your expenses are. If people feel their expenses are high, that is their issue. We’re not here to judge. And, if they truly want to change their situation, they have the power to do something about it. They simply have to choose. And then act.
Often times we hear “We didn’t include that, because it was a one-time expense.” Or we’ll hear “we can omit that, it won’t happen again for a few years.” Our response usually sounds like, “Did money come out of an account? The expense should be recorded.”
Their “one-time event” may arrive with a different name, a different emergency next month, or next year. Better to over-prepare.
Spotting a leak can be as simple as identifying items exceeding the budgeted amount year after year.
But closing the leak is a different story. If the boat is leaking, plug the leaks, so you can sail tomorrow. Don’t expect a bailout will save the day.
Many small businesses, nonprofits, and individuals will simply prefer to introduce new money to the financial picture to plug all the leaks. If they’ve not prepared a budget before, their response may be, “we’ll just move money from this other bank account, to cover that leak.”
It simply doesn’t work that way. Many folks frown when we state, “that money is already accounted for in the budget. It’s already spent.”
At the start of a period, all known sources of funds are identified. All known expenses should be itemized. The trick to successful cash management is knowing how much is available, and where. When a leak occurs, your budget committee (or you, if this is your personal finances) needs to reallocate from one category to another, without creating a new leak somewhere else.
For example, category “A” in your budget exceeds the monthly spending allocation by ten percent on a regular basis. This is a leak which should be addressed in the next budget. But how to fix the leak now? You may find category “B” usually comes in with a four percent surplus, and category “C” often completes the year with a six percent surplus.
You can reallocate funds already in the budget, solving the problem. Without adding new money or assets, you have plugged a leak in your budget.