I have agreed to write guest posts in the Personal Finance Section in Under30CEO.com. I wanted to write about this because I feel our education system i.e Schools, Universities, homes etc do not teach Financial Management or how to manage money. I am not claiming to be an expert about this but if one wants to learn this well and ride through ups and downs of startups, every career, profession etc there are some basic rules and habits that are universal and timeless. I really don’t believe that this advice is exclusive for young entrepreneurs or startups, I have seen successful professionals who are poor money managers and all those people who win the lottery and are homeless in a very short period to time.
I want to start with a story, I was a money manager when I was 8 years old, yep you heard it right. My dad was a horrible money manager, on the other hand my mother was excellent, given that my dad was the bread winner in the house hold and the fact that he was an entrepreneur we never had a steady stream of monthly cash flow. For as long as I can remember while I was still living with my parents, we never had money i.e we never took vacation, we never owned our home, never bought gifts, did not live a lavish lifestyle or anything like that, I could see my mom always struggling to make ends meet. I always wondered why is that, I used to get cash gifts whenever I did well in school and I always saved that money and there were times that I had to bail out my mom with some emergency expenses. It was a strange feeling to be 8 years old and still have a habit of putting money away for a rainy day when your parents could not. The story is that I understood why that was, it was because there was no planning in my household. My mom was very disciplined in writing accounts, keeping record etc and my dad never once looked into that and his business went bankrupt a couple of times. He felt the problem was out there and had nothing to do with him being a poor financial manager. He always felt that Money Management in his business was his Auditors problem. I never understood it until I started learning about business and financial statements. My dad was nothing like the Poor Dad from the book Rich Dad Poor Dad, he ran his own business but never took the time to learn financial management. I think there is nothing more important than understanding one’s finances, this goes for individuals as well as young startups or businesses.
The first advice every personal finance section gives is “Don’t use Credit Card“… duh! I think it is very easy to spew advice when you are not the one facing the challenge. I think the fundamental question one needs to ask is Why am I forced to use my Credit Cards? and invariably the answer is straight forward… Cash Flow Management. What do I mean by cash flow management? All the business books, wikipedia, and every resource out there on the web de-personalize this “thing” called Cash. I want to make it real. Here is a definition from Wikipedia… I want to throw up when I read this, can you make this more boring?
Cash flow is the movement of money into or out of a business, project, or financial product. It is usually measured during a specified, finite period of time. Measurement of cash flow can be used for calculating other parameters that give information on a company’s value and situation. Cash flow can e.g. be used for calculating parameters:
- to determine a project’s rate of return or value. The time of cash flows into and out of projects are used as inputs in financial models such as internal rate of return and net present value…
No wonder no one wants to learns this stuff. How do we make this fun? well, Robert Kiyosaki has done just that he has created a game called CashFlow 101. It is a good way to learn how to manage one’s cashflow. Cash flow is a very simple concept, how do you generate cash and what you do with the cash you generate. Usually, you resort to using credit card when your cash expenses are greater than your cash income. I believe educating oneself in the cash generation and cash spending activities is key to discipline in cash flow management.
So what are the 2 rules of cash flow management?
Rule 1: Don’t spend more cash than you make, if you don’t make any cash figure out a way to make cash. That is a life lesson, figure out the need in the market and find a way to fill that need, when you do that usually you get compensated with cash.
Rule 2: Refer to rule 1.
It is that simple and common sense. But you see common sense is not common practice and doing the simple stuff is the hardest.