Tuesday, August 23, 2011

Cash flow management I

We all heard how important managing cash flow is. In business, if cash flow management is not up to par, it'll lead to bankruptcy even though the company has a strong balance sheet and income statement. Cash flow is the life blood of business, and so it is also the life blood of individuals. It is really just about tracking each drop of cash that comes in and out of your bank account so that you know where the cash flows to at the end of each month or each accounting period that you decide.

How to begin, one may ask. I think the very first thing you need to do is to begin tracking the cash that flows out of your pocket every day for a month. If you can have the discipline to do so for around 4 months, you'll get a good picture of what your baseline expenses are. Baseline expenses are what you have to spend on things that are necessary, like food, housing loans, pocket money for kids and parents, bills and so on. Those are the fixed expenses, as opposed to discretionary spending like the occasional gadgets, a new tv or a holiday trip. Discretionary spending are, well, discretionary, so they are variable by nature. It doesn't occur every month, or at least, they shouldn't.

If you sum up your variable, discretionary expenses with the fixed, baseline expenses, you'll get the total expenses for that particular month. It sounds easy, but it requires a lot of discipline to actually track and record every transactions you make. Try it, and see if you can last a week. I think everyone can have the discipline to do this, it's just whether you are properly motivated or not. If you don't see the point of doing so, then you won't be motivated to do it. As for me, I've been tracking my expenses of 3-4 year now. I started off wanting to do it for 1 month only, but it gets kind of fun knowing exactly where my cash flows to at the end of the month, so I carried on doing so. Now, I can tell you a very good estimate of how much I spend per month.

It's as simple as to begin tracking down your transactions

That figure is one of the aims of tracking your expenses. If you know how much you earn per month, and you know how much you spend per month, you can tell if you have positive or negative cashflow. Positive cashflow occurs when you take in more money than when you spend them i.e. cash inflow is greater than cash outflow. Negative cashflow, on the other hand, occurs when you spend more money than what you take in i.e. cash outflow is greater than cash inflow. It is obviously better to have more months in a year where you have positive cashflow.

The only way in which you can have a positive cashflow is to spend less than what you earn monthly. There are no two ways about this. Assuming that you have positive cashflow, so where do the difference between the cash inflow and cash outflow go to? It becomes your savings! It is only when you are disciplined enough to control your expenses below your earnings that you are able to save up every month from your take home pay. If your expenses is 50% of your earnings, then you will save 50% every month. If you spend 80% of your earnings, then you will save only 20% every month. What you do not spend is yours to keep, so try to keep at least 10% of your monthly take home income. If you manage to do that, for every $1 that you earn, 10 cts will be yours to keep!

It's important to have a healthy saving habit. This cash is important to kick start a lot of programs that are beneficial to you downstream. Without this stream of cash that comes upstream, you will have to work forever just so that you can live each month paycheck to paycheck. The good thing about savings is that you can use this to do 3 important things: Emergency funds, Insurance and Investment. The first, emergency funds, are used to deal with immediate life changes like retrenchment, medical fees (the initial cash component that is not paid immediately by insurance) or a punctured tire. The second, insurance, is meant for protection against the loss of life, limb, health conditions and the ability to carry on making an income that generates the cash inflow in the first place. The last, investment, is meant to grow your savings into a bigger sum so that you can achieve the financial goals of your life.

So try it! Begin a new and financially healthy life by good proper cashflow management!


Createwealth8888 said...

Do remember to include our year end budgeting exercise on how to spend our money for the next year so that we don't over-save and under-spent?

PanzerGrenadier said...


A timely reminder that cash flow is important. I'll highly recommend "Your Money Your Life" by Joe Dominguez and Vicki Robin as they share how literally managing your money is important as it is your life energy flowing out when we spend money that is hard earned from our sweat and tears :-)

I continue to track my expenditure and in fact feel strange if I don't touch my expenses spreadsheet for longer than 3 days in a row. :-)

Be well and prosper.

financiallyfreenow said...

Hi LP,

Your statement "I started off wanting to do it for 1 month only, but it gets kind of fun knowing exactly where my cash flows to at the end of the month, so I carried on doing so." resonates with me so well. I also started tracking my expenses and wanted to do it for only a month. But have continued ever since March this year as it's quite fun and addictive. I keep track of every single expense even buying Straits Times for 90 cents!

financialray said...

Yes, to start savings ASAP is important and to do that, need to have positive cash flow.
Never too young to save.
A 40 year old guy who wants to retire at 60 only have 240 pay checks to collect provided he is not retrenched at all over the next 20 years.
To save requires a lot of discipline, motivation and delayed gratification.
However, I do not track my expenses so closely as long as I know I am a lot in the positive side, I am ok.

la papillion said...

Hi bro8888,

Hmm, you do that right? I don't have the habit of doing yr budgeting and have not done it before. I only budget on special big projects so far. Thanks for sharing!

Hi PG,

Yea, everyone should at least read that book once. It made me aware of some concepts regarding life goals (I thought I knew that already!). Thanks again for recommending that book!

Haha, it's quite impossible for me to not touch my expenditure spreadsheet if I spend money. I'll actually feel 'strange', like I forgot to take change or something...haha!


Long time no see :) Haha, et tu? Yes, me too - I keep track of things as long as I take it out from my pocket. But if it's less than 10 cts, forget it, haha

la papillion said...


No need to track so closely lah, it's not necessarily for everyone. If it's not fun, I wouldn't have done it for so long anyway. However, it's important to know the overall picture on a monthly basis (i.e. I've a + cashflow of $500 or whatever) for planning purpose.

I try to save at least 50% of income, and spend less than 50%. This means that for every month that present me is doing this, I'll save a month to support the future me. Fast forward, if I work for 20 yrs, I'll have saved enough to last me 20 yrs without me working. Of course, things will happen to remove that savings, but the general idea is there.

Save now so that the current you can support the future you!

Temperament said...

Hi LP,
i really take my hat off to all those people who can track their daily expenditures so closely and still enjoy it.

For me, i just try not to spend unless necessary. If i have to especially "big items", i will check my current net worth and cash flows to see whether i can still live normally.

i only track my expenditures by monthly banking statements.
As long as it's positive, i am happy.

i like to believe almost all working classes are doing well in the end through "IGAS"- property, bond, stocks, etc. not their savings unless you are one of the CEOs of Big Blue Chips or one of the "Ministers of slaving population".

Anonymous said...

Agree with CW.

For me, i set a projected budget of the major items that will be spent over the next couple of years.


financialray said...

Savings is perhaps like starting a car.
Investing is like driving the car to our destination, both of course need insurance.
Similarly, car drivers usually male while females usu tend not to pay so much attention to financial matters.

la papillion said...

Hi temperament,

Well, it depends on one's temperament, haha! As long as you know whether at the end of the month, that you saved more than you had spend and you lived below your means, any way that you find comfortable should be good. In fact, comfortable is paramount, because if you're not, then it'll not last.

Savings shouldn't be the end game. It's what one does with the savings that matters ;)


I don't really set a budget for every item, as mentioned. But I did do up for major things, like marriage, housing, renovation etc...

Hi financialray,

Oh, I love your analogy! It's very apt!

financialray said...

I read in "my paper" today of this sandwiched family who is struggling with insurance. Sometimes it is not just cash flow for emergency funds, insurance and investments. We also forgot retirement planning for ourselves.
The writer lamented that he had to pay quite a bit of cash for his parents' shield plans who are over 80 years old. That is quite scary considering the amount of cash needed. I can identify with the writer and the problem will be worse when our aging population shrinks further in the next 10 years. The medical insurance for our elderly will be rise while fewer children can support their parents.

la papillion said...

Hi financial ray,

I can totally empathize. I also have to foot the bills of my parent's h&s plans. They do not have any life insurance or CI, which is typically of their generation, so this will have to do. Also have to be prepared to take out emergency cash in case something bad happens...just part and parcel of life being in the sandwiched generation.

So, we not only have to take care of our future selves, we also have to take care of our parents and our kids. One or two generation would have to sacrifice, so which one would it be?

financialray said...

Hi LP,

I think the scenario is so scary that maybe 2 or 3 generations are all affected.
Imagine the aging population see more claims while premiums drop because of declining birth rates for last 10 years and next 10 years. Insurance will raise the premiums perpetually and the elderly will be priced out of their H & S plans when they need them most.
The Singapore Government has to relook their incentives to boost birth rates ASAP. Don't believe Wong Kan Seng who mentioned last year that incentives are adequate at the moment. The longer we delay, the higher the costs. As it is now, MM Lee says we will need to break the banks to increase birth rates. Well, we have to try something at least or rely on immigration which risks social disintegration, eg who wants to do NS if >50% of population are foreigners. The domino effect and repercussions of a declining AGING population has to be seen in terms of survival of SIngapore. Before we need to break the banks, it is still nec to consider incentives ASAP rather than regret years down the road.

Singapore Man Of Leisure said...

OK, I must say my peace. We humans sometimes worry too much...

There are also insurance and retirement "bubbles". Buying protection or making retirement plans we can't afford to me is the same as living beyond our means.

I wonder do birds and animals worry about their old age or what happens if they get sick... I know it's a bad analogy; but whatever will be will be.

Will the sky fall tomorrow? Will there be a earthquake? The best insurance to me is living :)

financialray said...


I can understand how you feel...from an individual's point of view...
In fact, I have seen many elderly relatives who are equally carefree and they usu don't want to know too much of their health problems and wish nature would just take its course...
Unfortunately, we are talking about an entire nation here