Using Your Financial Records Effectively

Once you have taken the steps to complete your cashflow and net worth forecasts you are ready to get down to business. Maybe the process took several evenings get everything figured and entered, but it will be worth it. You have now created a wonderful tool that has many, many uses. Let’s look at some.

First of all, you should now have a pretty good idea of where all of your the money has been going. As months go by, you can begin to put together a pretty smart guess as to where it will go in the future. By knowing future demands, you should be able to eliminate some overhead. Bank service charges can be cut and or eliminated. I did by using my debt/check card one time per month. Borrowing can be kept to a minimum. Maybe you will be saving a bit more in the months ahead. If, on the other hand, you are spending more, you should be able to quickly see where it is going.

The fuel which keeps a business operating smoothly is its working capital. A business may have buildings, equipment, tools, trucks and other fixed capital worth millions, but if it does not have the bank balance to meet its payroll and buy raw materials, it cannot survive. In other words, a percentage or proportion of the capital of every business must be in liquid form. And the same is true for a family.

In every family, and in every business, there is a ratio between working capital and the amount of money flowing in and the money spent. The working capital of a business is defined as the difference between its current assets and current liabilities. Any company likes to feel that it can easily meet its regular obligations and take advantage of buying opportunities or chances for expansion if they arise.

Assume that a family’s working capital is simply its average checking account balance. Use your cash forecast to estimate your own. For each period, average the initial balance after you have deposited your paycheck and the final balance. Then average all twelve. This figure has a definite ratio to your net worth. Take the family with the $300,000 house and two cars. It obviously runs a bigger total of monthly bills and needs a bigger bank balance than a family that rents a small apartment and has one car.

When a businessman’s working capital is too low it puts him under a strain. He feels as though he were driving a car too fast. There isn’t enough time to slow up or change course if a sharp bend appears in the road.

In the same way, many families keep too little cash available for day-to-day living. The reason is usually not lack of money. Rather, the money available is poorly distributed. Too much is tied up in fixed assets such as a house and a car, or in an overambitious investment programs or the credit card balance is maxed out buying “stuff they needed” and interest is eating away every month. Bad money management may cause bank service charges to be unreasonably.

By keeping an extra $500 or $1,000 dollars in your account, you might save from crisis living overdrafts. An average bank balance equal to one month’s income is for most people a comfortable level.

Too small a bank balance can also cause unnecessary short-term borrowing and prevent the taking of discounts for prompt payment. It can even hurt your credit by making you late in paying bills. But worst of all, it can cause all kinds of worry, stress and strain as payday approaches and the bank balance sinks dangerously close to zero.