I’ve often expressed the similarites between corporate and personal finance, and both have pinnacle theme essential to success: Cash Management. Since I graduated with my Bachelors in Business & Administration 7 years ago, I’ve rotated within numerous different finance/accounting roles for several global fortune 500 companies. One of the important roles I assumed was in a treasury function, not only was it great corporate finance experience for my career, but it also gave me a ton of insight on how to manage my everyday finances.
When you are involved within the treasury department of a corporation, you learn a variety of useful information. The goal as a cash manager is to monitor your daily cash position. To manage your daily cash you need to make sure that you have as little money sitting idle as possible. Everyday you make sure you have enough money to cover both scheduled payment, as well as unexpected outflows of cash throughout the day. This involves forecasting your cash inflow and outflows. The goal is to make you sure you don’t overdraft your accounts, while at the same time you don’t leave your cash idling and unable to earn interest. This involved meticulous planning and attention to detail. Each day I would take the overage in the company operating account and decide how much to invest in both short term and long term investments so that it the money could earn to its maximum potential.
Fast forward to my life as a financial blogger and financial head of the household, and I see that these techniques that once seemed irrelevent in my personal life are central to how I operate my finances now.
- Cash Forecasting: Ok so maybe forecasting your cash inflows and outflows on a daily basis is a bit overkill. However, don’t discount the importance of forecasting your cash flow at the beginning of each and every week. I would say that you need to forecast at a frequemcy of no less than each pay period. Once you have a general template in place it can become quite an easy process. Make sure you have enough to cover your bills, and complete a forecast of personal expenses that you often incur. This is the bare minimum of cash that you need to keep available.
- Investment Management: Once you have a good idea of your cashflow situation you can begin to focus on planning and managing your investments. Having a weekly, monthly, and annual forecast of your expected cashflow is essential to optimize your investment strategy, and I’ll explain how. The most basic and simplest form of earning interest is within a savings account at a bank or credit union. This is a very safe and liquid place to store your cash, thus you can’t expect large returns, in fact you most likely won’t even keep up with the pace of inflation. Regardless, you need an emergency fund within arms length if needed, and this fulfills that need. Next, you need to identify your medium term needs for cash and liquidity. Perhaps you have a home remodeling project to undertake next year, it’s far enough away that the money isn’t needed immediately, though you can’t afford to have a totally illiquid investment either. I have an online brokerage account that satisfies this need. I mainly invest in mutual funds and proven dividend paying stocks, this outpaces my paltry returns from my savings account, but I can still liquidate the funds within a relatively short amount of time. Lastly, we have our long term cash needs. You may be interested in purchasing a retirement home several years down the road. Quite honestly you can determine your threshold for risk and let that determine your investment strategy, but keep cashflow and liquidity in mind when making these decisions. I have a social lending account that is extremely illiquid, yet provides the best returns of my three different interest earning accounts that I have. I am consistently investing in 3 to 5 year loans and I need to make sure that the funds I allot to my Lending Club account will not be needed for quite some time.
It’s easy to see the overall importance of cash management in our everyday lives. I’m willing to bet that many of you who read this article will probably disregard the need to forecast and manage your cashflow. I can’t urge you enough that it can and will help improve your life and your finances.
If anyone would like assistance with setting up a cash flow model and program to better their financial lives, please feel free to contact me!
