How To Run Your Household Cash Flow Like a Business
Household Business Cash Flow Though the principles I am going to be discussing in the subject can be effectively applied for anyo...
Household Business Cash Flow
Though the principles I am going to be discussing in the subject can be effectively applied for anyone, I aim to discuss from the perspective of a married person.
As someone who got married about seven years ago, I came to realize that the world of the married is strangely different from the world of the single, and the world of the married-with-kids is also very different from the world of the married-without-kids. I by no means mean “better”. I meant “different” both implicitly and explicitly.
Most of us who are married and operate in a career 8-5 jobs do not know that in every way we must run our families as a business. This is how G-d meant it to be. Hence, in most successful business homes, you can almost not be able to distinguish between the family and the business. They are one and the same thing.
When you read about Abraham, Isaac and Jacob(Israel), you see this same model. There is no distinguishing. Any attempt, would make a man take recourse to mediocrity.
So what is a business? In a simply layman’s language, it is that which you run in order to keep life going on and moving forward.
In that term “going on” can be derived the usual business term for a firm, namely “going concern”. And by moving forward, I mean making progress and increasing in productivity and efficiency. G-d never designed man to remain in the status quo, so we must make plans for “capacity expansions” always, and that is the meaning of the term “prosperity”.
If you are in Nigeria and work, by now you will realize that the times are hard and inflation is also on the rise. Cost of life-sustaining commodities such as food, fuel, etc. are all on the rise. Hence, one cannot afford to live in the “status quo” or “going concern” mode. Even businesses whether big or small are embarking on “cost-cutting” strategies and “leaning out” models. Unfortunately the only man that does not seem to understand what is going on his the salary-earner. He keeps living in the same way, not realizing that the factors of production are on the rise, but his income is shrinking. In fact, based on my recent analysis, in the current economic reality, your income has been effectively halved( reduced by 50%) using the exchange rate as main parameter. Why? Nigeria is a “buying” economy and since it is designed in such way for now, most of our life-sustaining expenses are in dollars, though we pay Naira.
What does this situation call for?
Remember, my discourse on the “Seed-time-harvest” cycle. It is fully in operation here. Both “seed” and “time” must be employed wisely for the “salary-earner” to live above waters and then move forward.
So you now ask, “How?” The how-s are as outlined below
- Salary-earner must rethink his way of seeing himself (He must see himself as a “business”)
- Salary-earner must understand the concept of CASH-FLOW, as against “Income-Expenditure”
- Salary-earner must build his/her financial model for the year in advance
· He must run his family like a business that it was meant to be.
He must see himself as a “business"
He is already a “business” without realizing it. His business profile is his “resume”. His income is his salary. He has “operating expenses” which are his feeding, transportation, school fees, etc. And you can call those “OPEX”. He has "CAPEX expenses" in that he spends on buying a New Car, A New House, and other tangible assets that could help him achieve his business objectives.
So what is his profit?
In a simplistic way, his Profit is
Then Net Profit,
I know many of us do only make attempt to look at our “Gross Profit”. But I like to challenge you to take a look at your “Net Profit” on a monthly basis. I can bet that it will not be more than 20% of your Remuneration (Revenue).
Do not be afraid to take a peek. You might even realize that it is in the negative. Don’t be discouraged. Knowing your “business health status” or financial well being is the beginning of your journey to improved efficiencies.
He must understand the concept of “cash-flow” or “net working capital”
Every business and small business venture understand that these two concepts must be within its business toolbox in order to survive, talk more of moving forward. To make it simple, whenever as a business you are awarded a deal or contract, but you struggle to execute due to inability to marshal resources to site and get work done, then you have a “small business cash-flow” problem. Yes, you know how much you will receive at the end of the project. You have the PO, and other promissory securities, but you do not have the resources to execute. You just know you cannot deliver this project. That is why we often hear that “cash flow is the life-blood of a business”. The same goes for a household. For your information, when economist derive the GDP, they put household incomes and productivity into the factoring criteria. This further proves my point that you must run your “family” or “household” efficiently like a business. Unfortunately, many of us who are “managers”, “general managers” and “executives” do this so well for our organizations, but not do so for our households. What a paradox of life!
Wake up and make up your mind that you will also become successful at managing your household. Remember, you retire finally to your family and household and leave your job sooner or later.
I believe in living my life by design or “template”. I will display for us a template that depicts what a “Cash-flow forecast” looks like and we will run through how it is developed and used to manage our “household-business” later.
Sample Cash Flow forecast
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| Sample Cash Flow forecast |
The key benefit of a cash-flow forecast is that it helps you to plan ahead your “working capital” aka the “money that you use to do business”.
When you get this right in your planning, then you free yourself from the life that is “overly geared” or “the sorrow of borrowing too much” and the stranded-ness of life.
There is a huge difference between a cash-flow forecast and an income-expense plan. While an income-expense plan can show you or give an idea of what I call “virtual profit” or “snapshot profit”, a cash-flow will show you “real-time” when and how you will be in cash or “cash trapped”.
You can tell well in advance when and how you will not be able to meet up an important financial obligation, such as “paying your creditors” like school fees, etc.
So, your cash-flow forecast shows you all your financial “entrance” and financial “exit” points in your household business and also reports to you the “net” cash that is left when the “entrance” or inflows and “exits” or outflows occur, based on milestones/timelines you have set.
This calls for wise and strategic planning.
You must be able to aggregate all sources of your income and “classify” them into 3 major groupings, namely: Operations Activities, Investing Activities and Financing Activities. Your Operations activities will encompass such expenses or “cash outflows” as electricity bills, transport expenses, feeding expenses, etc. as well as “cash inflows” such as Salary/remunerations, bonuses, etc. Your Investing Activities will entail such things as paying to buy a landed property, house, and any other such investments as stocks, bonds, treasury bills, etc. upon which you hope for some future returns. While your Financing Activities could be such inflows due to taking a loan from the bank for some home improvement projects, etc.
Check the “net” (what is left). That will give you a good idea of your “working capital”. So, the next question becomes “Can the Net Cash Flow you see in your excel sheet be able to help you run your family business for the month before the next cash “entrance”? If the answer is no, then you should go back to your “Income-Expense” book and adjust your expenses. This indicates that there are items or expenses that you should delete.
This calls for Prioritization. Do you really need that pair of shoes? Or that new handbag? Do you really need to pay for that gym? Keep iterating and re-iterating till your Cash flow forecasts gives you a positive Net Cash flow that would be able to sustain your Household business.
Also learn how to manage your “creditors” and “debtors”. One rule of thumb says that one should “delay” payment to creditors (those you owe), while “fast-forwarding” cash receipts from debtors (those that owe you). Think of it, this really means a positive cash flow, based on common sense. However, you need your negotiations skills to achieve these without a fight or conflict.
When you delay payments, you help yourself to retain funds for the “operational expenses” required for running the “household business”, otherwise you stand the risk of suffering a negative cash flow, after you have played the “good man” by quickly settling all your outstanding creditors. Then “household business” running suffers – miscellaneous expenses are not paid and could lead to greater conflicts and family instability and more dangerous consequences.
I recommend getting an expert in Accounting to help you develop an excel sheet and training you to plug-in the figures, formulas and setting up simple dashboards that could quickly show you such “KPIs” as “Profit margin”, Revenue”, Expenses”, “Debt/Income” ratio, “Net Cash Flow” etc. so that at any point in time you can see your Financial Health Status and adjust your Financial behaviours accordingly.
Trust me on this one. If you do this regularly and consistently, you will greatly improve on the management of your “household plc” , eliminating wastages, leakages and unnecessary expenditures.