If you find yourself always cash-strapped before the next payday, your problem is cash-flow. In times like the post Brexit and Trump financial administration, it is best to practice managing your cash flow more effectively, when there are lots of business expenses such as travel, property, rent, taxes and investments to pay back.
According to financial experts, it is important to have an asset management system in place. “Whether you are making significant expenses such as a property purchase or equipment repairs around the office, it always helps to keep a tab on your cash flow.”
What is cash flow?
Simply put, your cash flow is the net sum of cash going in and leaving your account or business. A positive cash flow is a sign of increasing liquid assets. This allows you to settle your debts, reinvest into the business, pay staff, save for the future and more. A negative cash flow means your liquid assets are diminishing. If this continues, the company or individual may soon file for bankruptcy.
The following steps will guide you towards making better financial decisions with your income.
Review your budget
Many people have a budget or are aware they should, but don’t really know how to go about using one to manage their cash flow. Budgets change and should be reviewed regularly. If you upgraded your home’s heating system some months ago, and forgot to include the extra expenses in your budget, it will affect the cash flow.
One way to start is by identifying the biggest cash flow drain in your budget. If there isn’t any, you’ll need to remove several small ones. Sometimes magazine subscriptions and streaming sites like Netflix can be the culprits. Also, watch out for the restaurants where you eat; you may need to pipe down the exclusivity a bit.
Watch your debt repayments
It is good to offset your debt, but you also want to be careful about your strategy. If you are too eager, you may find out you are running out of cash instead. In times like this, it is better to opt for a snowball debt payment strategy over an avalanche strategy. In the former, you pay your debts in ascending order of amount (smallest first) and urgency. And it’s the reverse for the latter.
It is important to be strategic about rectifying debt. If you have a loan with an interest rate of 15%, you may want to pay down immediately. But for loans between 6% to 8%- student loans and mortgages- you should deal with them more carefully.
Create a cash cushion
Some experts advise growing a cash reserve as much as a month’s salary. This is more critical than paying off your smaller loans. The objective of the cash cushion is to grow it as much as up to 3 months’ worth. The aim of this is to help out with unavoidable emergencies that come in life, such as health problems, a broken gutter, or job loss.
Prepare for those annual expenses that easily escape your mind
There are expenses you make every year like your car registration, annual membership fees, or wedding anniversary gifts. These expenses can surprise you if you don’t prepare for them in advance. Have a financial calendar of these expenditures and start putting money aside for them, or you can change your lifestyle habits to give more leeway.
The goal is to prevent your outgoing from exceeding the incoming by applying a more careful approach to the way you spend. If you require professional assistance, you can consult a financial expert to guide your finances.
