Cash Flow

I've heard people wonder how a seemingly unsuccessful company survives while a highly successful company suddenly fails. Often, success or failure is caught up in cash flow. Whether you're a multi-billion dollar corporation or an 18-year old college student, cash flow is a cornerstone to financial success.

My first lesson in cash flow came early in college. My tuition was paid by a scholarship, but I had to buy books then get reimbursed. I was employed and had a system for managing cash flow. Each pay period I deposited my paycheck then spent until my next paycheck came.

I'd been doing fine with this approach until I went to buy books for Spring semester. I had a reimbursement coming that hadn't arrived. I thought my checking account had enough money to cover books. A swipe of my debit card revealed it didn't. I stood there with books on the counter and no way to pay. A quick phone call to Mom and I was back in business, but I'd burned myself. What could I do?

Cash flow is one of the easiest and hardest things to tackle. This is the first in a series of cash flow posts that'll take us from figuring out where our money goes to deciding where our money should be going. Today we'll tackle figuring out where money is going.

For the first five years on our own, Kerri and I had no idea where our money went. For the most part, it wasn't hard to figure out. We were poor college students, so there wasn't that much to spend. Even then, when we finally figured out where we spent money, we were keeping Taco Bell in business.

Figuring out where your money is going is easy with a little discipline. I like to use the following process.

1. Receipt Bucket: Put a jar or container of some sort on your kitchen counter and keep every receipt for 90 days. Every receipt includes your utility bills and your afternoon diet coke. If you buy something with cash and don't get a receipt, write it down on a slip of paper. The goal is to keep track of every expense regardless of amount.
2. Categorize Your Receipts: Categorize all of your receipts at the end of each month. Choose categories that make the most sense for you. Your categories will probably become clear as you start looking through receipts. Mine were something like household (utilities and rent), automobile (maintenance, car payment, gas), and Taco Bell. I like to use a tool for this part. A spreadsheet is as effective as any.
3. Categorize Categories: Once you know your categories, you can determine which of them are necessities versus optional. Eating is necessary, Taco Bell is optional.
4. Total Necessary and Optional
5. Compare Your Spending to Income: How does it look? It didn't look good for us. We earned more than we spent over the 90 days, but not every month and had several relatively large optional expenses.

Once you've gone through this exercise, you'll have an output for expenses that looks something like the following table.

If you've come this far, you're on your way. Tomorrow we'll talk about how to improve your cash flow by managing expenses.

Josh