Manage Monthly Cash Flow

Checkbook and calculator - Credit: iStockPhoto.com

Successful businesses are typically very meticulous when it comes to managing their cash flow. Even when businesses are facing tough times, payroll continues to be met, bills are paid and the company can still manage to selectively move forward. Managing your own cash flow is akin to monitoring the finances for a business. Yet, we rarely consider applying the cash-flow techniques that make businesses successful to our personal lives. Here are some common business cash-flow management techniques that can practically be applied to your personal finances to help you manage your monthly cash flow.

Pay late

Businesses will often ask for net 30-day terms when purchasing services from a vendor or supplier. When a company is supposed to send you payment, it likely does not come the day after you send the invoice. Part of this is due to accounting controls, but the other part involves effectively managing cash flow. You can easily take advantage of this same approach to manage monthly cash flow. Whenever you get a bill, whether it's for utilities, internet, cell phone, or credit card, note the payment due date. The payment is likely not due until two to four weeks after you receive the bill by e-mail or in the mail. Although it may feel rewarding to pay the bill right away and have it off of your plate, you should exercise discipline and pay the bill as close to the due date as possible without being late.

During this time, you can put the money in a savings account to earn some interest or, at the very least, build up some cash, as sometimes one or two paychecks can show up during this time frame. If you really want to take advantage of this, pay as many bills as you can with a credit card. If you can, control the statement date of your credit card to align with the due date of the bill. If you play your cards right and use the grace period offered by both your utility company and your credit card company, you might be able to delay writing the check for 45-60 days after the service has been billed and provided. Use that time frame to earn interest on your money and collect some additional paychecks in order to build your cash flow base. Specifically, consider a money market or daily sweep account with no fees or check-writing abilities. You won’t get rich by earning the interest, but it is found money and you are more likely to have some excess cash on hand if needed.

Forecast your finances

All businesses use financial reporting and forecasting. If you ever take a look at your managers, they likely have some form of report on hand regarding their company's financial performance. This will include the numbers from past performance as well as future expectations available for review. As an individual, you can do the same to manage your monthly cash flow. You should build a cash-flow spreadsheet that forecasts your cash position in the coming months. Include your anticipated paychecks and monthly expenses.

It's a great tool that will help you paint a picture of where you may be in three, six, 12, or even 24 months from now. If you can be confident that you will have a certain amount of money in your bank account six months from now, you can plan expenditures accordingly. Additionally, take some time each week, or at least each month, to review your financial position. Review your cash balances, spending habits and income streams to compare your actual results with your anticipated results. You may find that you need to cut spending in certain areas, or perhaps you're in far better shape than you originally thought you would be. Either way, it takes the guesswork out of your finances and keeps you in control of your money.

Use debt appropriately

There is absolutely nothing wrong with debt, as long as it's used responsibly. General Electric, for instance, has $515 billion in debt and only $16 billion in cash in the bank. This is appropriate because GE uses the debt appropriately to build their business. While by no means is it suggested that you should get in over your head, you shouldn't shy away from debt for the right things. For example, if you're able to secure a car loan at 0% interest, you would be foolish to pay the balance off all at once. Even if you have the cash on hand and can’t stand writing a monthly check, take the entire amount, place it in a totally separate account and let the car loan payment automatically come out each month without you knowing. On a $15,000 car, with a 5% interest rate, at the end of four years you will easily have an additional $3,000 in that account and your car will be paid for. Be confident to use debt where it is advantageous to your future growth, but hesitate to use it for going in too deep and over your head. If you can retain your money now to make more for yourself and pay what you owe later, it's a big win.

Establish reserves

When you know you're faced with a big expense, such as a down payment on a house or a big car repair, start saving for it as early as you can. Merck & Co. Inc., when faced with the Vioxx lawsuits, immediately began building a reserve to put the money aside. Three years later, a general settlement was agreed upon, and with all of the money put aside, Merck was able to easily pay the settlement. We've all heard the budgeting need for an emergency fund, and yes, you should have some cash available for short-term emergencies. However, to take it one step further, start putting money aside in your personal reserve as soon as possible. The sooner you can set up such a reserve, the less effort it will take each month to reach your reserve goal. In the end, even if you never make that big purchase, you'll have a windfall of money at your disposable for other financial goals.

take some business cues

Businesses go under for one reason and one reason only: they run out of money. As an individual, the same fate would apply to you if your cash flow was not in order. Successful businesses pay close attention to their inflows and outflows and take advantage of techniques to maximize cash flow and earning ability of the cash on hand. Practically applying these concepts to your own personal finances can do wondrous things for your financial position and, again, put you in control of your finances, not the other way around.
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