Cash Flow Management | The Essential Element in Property Investment
When asked about their budgeting habits, most Australians would say that they manage their money excellently. Judging by today’s high debt rates and stress patterns, it would appear that some of those who think they are managing their money well are actually doing the opposite. Whether you’re in charge of your budget at home or are taking care of your company’s finances, cash flow management is important to your overall success. Throw in property investing and it becomes a vital lifeline to keeping your business (and your own finances) afloat. But why is this? If you’re making money and holding onto it, is managing where every cent is going really necessary? The answer is always an unequivocal “yes.”
As an investor, you should know just how crucial liquidity is to your household as without it, you couldn’t manage your day-to-day activities comfortably. Keeping your money under control with proper cash flow management strategies can take your current household from just skating by to bursting through the roof.
How Does It All Work?
If you look back to when times were simpler and credit cards were unheard of, people have a different idea when it came to money management. They didn’t over-complicate things by opening up lines of credit or spending their money before they had it. Each day they brought home their hard-earned money, stuck it in their various jars for savings, food and mortgages and went about their way. Now, this scenario was a common one partly because they didn’t have the resources available that today’s generation does. However, considering that back then they had lower debt and anxiety levels and a lack of understanding on the potentials of leverage, perhaps simplifying is the way to go today.
Cash flow management should be straightforward and easy. But it’s more than just balancing your books at the end of the month.
It’s measuring everything that is coming in and going out, reconciling every single penny and then making a projection for your future through a cash flow forecast. By following these clear-cut rules, you will be able to build wealth in your business in ways that you never thought were possible.
When you’re just getting started trying to figure cash flow management out, the most important thing to recognize is that it all comes down to mindset. If you’re like the majority of society today, you’ve probably tried many different ways to get your money on track and most likely have come up short. The best way to counteract this is to stop viewing your money management as a hindrance and let it set you free in many aspects of your life. Remember that cash management does not work on its own, it takes you and your money management system to make it work.
Where Does It All Come From?
So, with this in mind, how do you delve into the world of proper cash flow management and where do you start? The first step in managing your money is listing out all of your income. Where’s the source of money? The common suspects are wages, bonus, company profits, savings, borrowings, investments, rental property income etc. Keeping track of each of these will not only show you exactly where all of your income is coming from, it will help you to see where you could be making more. Tracking your incoming revenue gives you the first step that you need to then continue on following the rest of the cash flow management strategies.
Where Does It All Go?
After you’ve established exactly where you money is coming from, it’s vital that you figure out exactly where it’s going. Start out by listing each of your fixed commitments, such as payments on your properties, utility bills, insurances and other things that come at the same time every month without fail. Once you’ve got a solid list of all of your bills, you can start accounting for each penny left over and try to track how your discretionary spending is going. Making a plan for your cash flow is especially important in the area of discretionary spending. Discretionary spending is where people most often get into trouble as none of the money spent in this category is fixed. Accounting for how much you’ll need for petrol, grocery spending and entertainment for the month will help you to figure out how much you have left over to give back to your business. But let’s face it you want a life so a good way to manage this is to monitor your discretionary spending for a three months and get an average from it and extrapolate it out over 12 months.
Once you know where your money is coming from and where it is going, you should have a rough idea on how much surplus is left. If there is none left, this just proves that you have a serious cash flow management situation and should start thinking how you can cut down on your expenses. But if you do have surplus left at the end of the month, this should be provisioned to future investments, debt reductions or savings. After all, if you don’t spend money on investing, you can’t make any money on it either.
Can You Control It?
While the unexpected is exactly that, unexpected, gaining control of your finances is certainly possible. Giving each dollar a plan through an effective cash flow forecast can get you through whatever comes your way. Whether you’re going down to one income due to a pregnancy or have to take some time off work because of a medical issue, if you’ve looked forward and projected for issues like these, you will be prepared. Furthermore if you provision a ‘buffer’ of cash reserves the unexpected can also be managed through.
When things like these come up, and they will do, make sure that you don’t sacrifice good investment or properties
thinking that is your only option. Too often investors make a hasty decision in these circumstances when they could have avoided this simply by having a proper forecast for their current and future cash flow requirements.
Utilising cash management strategies help you take your business dealings to the next level. Don’t rely on a retrospective budget to get you by. Get rid of the “too much month at the end of the money” problem that many property investors face and take control of your cash flow. If you can remember that managed money always works harder for you, you will find greater success than you could have ever dreamed both in your investment business and personal life.
Take control of your finances and get going with cash flow management today.