I often refer to my belief that our treasure ships come in over calm seas. Within this context, below I explain how to build cash and things to be aware of that may prevent this from occurring.
WHY is Positive Cash Flow so important?
Well, ask anyone who has experienced both positive and negative cash flow. Get them to list out the impact negative cash flow has on them and compare this with when cash is easy. Negative cash flow can be really stressful, impacting performance, stress, happiness, relationships, ability for the business to grow, or benefit from opportunities that need cash. Extreme negative cash flow in cases where someone’s house is on the line can attack a person’s most basic of human security needs and /or their health, relationships etc.
Equally important is the ability to act like a squirrel and ‘save nuts for winter’ by accumulating an appropriate level of cash for later. In most cases this means having a beginning goal of one month’s operating expenses always being available. Over time and depending on the size and type of business, this is often best to build to three months expenses. With some seasonality and business types, sometimes even more is valid.
Cash flow is only ever a symptom of how the business is going – an output, an indicator that something else is not working well enough. Profit is another output that has a high correlation with cash. Profit should occur every month unless there is a seasonality aspect. Somebody should “make this necessary”. You won’t have cash unless you first have profit.
Cash is King, it affords you the ability to do what you want – the person with the cash always has the ability to make choices – that others otherwise may not.
Doesn’t matter which one of these reasons resonates for you – only one is needed. Think how your life would differ if cash was more readily available to you. Act on that feeling to apply the following suggestions.
How to Build Cash
Working to your money style is important in approaching the best way to generate cash. One of the most common things I have come across over the past 20+ years is people that get stuck in the “How”, often also feeling constrained by negative cash flow, feeling like they have little choice in how they pay their commitments and/or themselves when there is simply not enough. The general steps to building cash are listed below.
I realise that some of these may almost seem insulting, as they are so obvious – I list them for those of you that realise these things, but aren’t actually doing them.
- Ensure your business makes a profit, every month unless it is part of your plan not to yet. Know whether it is achieving the planned position. Btw, if it isn’t making a profit get some help with that. Seriously
- As long as your business is making a profit, pay yourself first. Gradually increasing your own pay to ensure you get to market levels as soon as possible
- Know the dollar figure you need for a fortnight or month’s expenses
- Have a business and personal budget
- Live within 90% of your personal income ( know whether you are or not ) Find a way
- Apply the other 10% to debt reduction or an increase to savings
- Once you have built up at least a fortnight’s expenses in savings, start to put easy, small amounts aside into a savings account every time you are paid anything
- Increase the amounts you save gradually over time – small steps can be important to achieve consistent sustainability
- Hugely important to work on the above gradually rather than trying to transition all at once – always remind yourself that the habit is more important than the amount
Your Core beliefs underpinning your finances
The above are all important steps to operate under – what I believe is more important however, is whether there are financial issues connected with attitudes about yourself, money and your business. I believe that your financial situation is a direct reflection of your wider world – if there are areas of your life that are unresolved from your past, not in sync now, or out of integrity with your core beliefs and values, I believe your cash position will be the mirror that reflects the area that needs work. I know, sucks eh. Doesn’t mean I’m wrong though.
Clearly it is important that the business “plans the work and works the plan”. There are many other reasons for business failure – sometimes people just don’t want what you’ve got – i.e. it is just not viable financially. If your business is not progressing as much/quickly as you want, answer the following questions for yourself.
Then in cases where the answers are not what you truly want for yourself, consider what the root cause is? The business itself may be fine, it may be you as the owner that has the issue most needing work. We all have blind spots. They are called that for a reason.
Questions to ask yourself if your finances are not what you want them to be.
This only works if you are truly honest and open with yourself:
- How much money would make you feel significantly more in control of your finances – let’s say $100k for this example?
- If I transferred that $100k amount into your bank account, what would you want to do with it?
- How much of it would be to pay off debt? How much would be for savings?
- How much would you leave in the bank account?
- How much additional money would feel like too much for you personally to cope with?
- What fears do you have around money if any?
- What goals do you have around money if any?
- On a scale of 1-10, how much certainty do you want around money issues?
- What relationships do you currently have with people about money issues – how often do you change advisors? i.e. banks, accountants, financial planners, insurance agents. Why do they change? Is there a common theme as to why?
- Have you ever had investors in your business? Do you still, how long for? How often have these people changed? Why? Is there a common theme as to why?
- On a scale of 1-10, how do you rank your competency around money issues?
- On a scale of 1-10, how do you rank your self-discipline around money issues?
- Are you getting the most return on your investments? How do you stay informed about that?
- Do you save regularly? For what purpose? How much of your income in percentage terms?
- On a scale of 1-10 to what extent to do you buy things because you deserve to have them?
- How often would you buy something you don’t really need, but just want for the fun of it?
- How often do you buy something that results in you being stretched financially?
- Do you feel you really struggle with your finances? How long has this been the case?
- What do you believe is getting in the way of your finances being better? What could you do differently to change this?
- Is your perspective on money different to that of your partner’s? How if so?
What to do with the answers to the above questions
The purpose of the above is to get you to have a really close look at your money style. All of us have differing issues to address. I believe most people can identify with one main money style, sometimes two. I call these styles Savers, Severed, Self-Saboteurs and Spenders. Each style has a key element to look out for and work within for improvement.
Answers to the above questions will help you identify which style you are likely to be. One of the names is possibly likely to immediately resonate. If you seriously have no clue, you will most likely be a severed style.
Savers tend to need high levels of control, normally based in some type of fear. The flow of money is therefore best assisted when there is a slight release on its grip – sometimes these people strangle their financial lives in the need for certainty (compared with what it may otherwise be).
To improve your money situation, try living a little more, just a bit. Don’t be reckless with that (I know you won’t be). Just for fun, practice taking a small risk every now and then. One suggestion is to not pay for parking and risk getting a parking ticket – or only put a few cents in, so if you do get a ticket, it doesn’t cost as much. Take small calculated risks often and your need for financial control may well lessen.
By allowing a higher level of trust in things outside your own control, this also allows money to flow to you from places that aren’t totally constrained by your own abilities. Release the grip just a bit and see what happens to your cash (and also your enjoyment in life).
Savers are also at risk of being too safe in their investment choices at times – so learn to understand the need to have your eggs in more than one basket. And be at peace with the fact that over time, the result is that at least one basket may go bad. Understand though, that done correctly, your investments overall are still more valuable than if you just have them in the safest place you can find. Get a really good financial planner and listen to them.
You are the easiest style to work with cos you have most things sorted, just a few things to improve around the edges. Deal to your control and fear issues and you will be sweet. I do believe that fear and control stops the flow of money more than anything else. The other styles also have fear and control elements underpinning them often, so you are not alone.
Severed money styles tend to be disconnected and don’t really know, nor care where money things are at. You tend to be very easy to work with if you have a goal and you also live within your means. Set up a savings A/P for that specific purpose. Get bank statements delivered in paper form so you get reminded how your savings are going. Take an interest in this.
Once a month look at your bank account transactions and notice for yourself where you are spending and how much. Change it if it’s not working for you. Job done.
Importantly, then work out what it is in your life that created a sense of disassociation and consider working on improving that dynamic. Money like anything, tends to lose interest if the relationship you have with it is non-descript or disinterested. Your life can often also have far less colour as a result. Increase the vibrancy in which you explore money issues and your life will also reflect this – it does actually work both ways I believe.
I believe it is far less common for a severed money style to not live within their means – these people are more likely to be self-saboteurs.
Self-Saboteur money styles tend to be the most fun for me to work with, cos we can get the best results – well for a while at least before they “do it again”. The trick with these people is to allow them to do so!
Don’t resist your own self sabotage tendencies – but do budget it in! Give yourself a play account to self-sabotage with – after a while you may get sick of this btw. But if it doesn’t hurt that much, you may not.
So, every now and then, give yourself the freedom you so desperately need, (but please, do so within your budget). It doesn’t take long to decide a different game when you have an increased awareness of what you are actually doing to yourself financially. Have a mentor – this is critical. The time to listen most is the day you want to fire them.
Remind yourself of what you are missing out on by not living within your means. There are many tricks for these people. Such as putting your credit card in a plastic cup of water and keep it in the freezer – that way you need to defrost it before using it – allows at least some means of decision making and cooling off period. Bit different if you do online shopping and like every good retail therapist you can remember your credit card number – so put a post it note on your computer to not do that. And reference to what you are instead striving for.
A really important thing is to do the same activities as you would like to do, but consciously decide to do it in a cheaper way – see your friends via a pot luck dinner instead of via an expensive restaurant – be honest about why you want to and they are likely to agree and thank you for it. It’s about them, not the venue. Buy an OJ or get water instead of a wine – half the cost and better for you. You can still do things, but spend less at the same time – by doing similar activities just a little differently or slightly less often.
You are the style voted most likely to buy something because you have a sense of self entitlement, instead of whether you can afford it. You “deserve” the thing, so you go out and get it – doesn’t work that way – got to be able to afford it first. If you respect money it will respect you back. If you don’t, it won’t. Financial things will go wrong until you learn this. The law of compensation, although slow, is very thorough. And it applies itself with a high level of accuracy. So honour it. It’s a choice and it will repay you in kind.
Spender money styles are similar to self-saboteurs but they consider themselves to be slightly more sophisticated – which they are. And this level of sophistication can be their downfall. They sabotage in a much more subtle way – they are the Queens/Kings of justification. Making every decision they make seem valid.
Self-saboteurs at least have the decency to admit their failings. Spenders always find a way to make it the “right thing to do”. They plan for it as well, often really well. None of this is a problem unless it is a problem. If you are a spender that lives within your means, well done. After all, we can’t take it with us.
I would suggest however also adding a long term view to your perspective and ‘check in’ on whether your retirement is going to be as much fun as your current life – change that a little and hang out with a saver for a bit to see what their views are on the same topics. Allow them to rub off on you – and you on them – you create a good balance for each other.
If you are a spender that does not live within your means, you also are instead a self-saboteur. So see above and start living within your means, so your long term position is both protected and maximised.
If you want to be more like a different style (they each have fabulous positive attributes as well as challenging aspects) hang out with one of them and ask them what the answers to their questions might be. You may be really surprised.
I believe it can take a year of focus to achieve the right balance for your business and personal goals financially, working within the strengths of your money style. Once you have mastered the various strengths of each style and compensated for the weaknesses, it is much easier to draw on the attribute needed for any financial situation at hand.
Increasing the flow of money, is first about removing the blockages you have mentally that are mentioned above. Then it is about widening the width of the channel in which money flows to you. Then increasing the speed in which it flows down that channel. It is important to learn to live within your means as a very first step and to do this at a very modest level. Once this is done, no matter what occurs in future, you can always revert to the lessons learned when you were in a more modest financial stage of your life.
In each moment you will choose whether you want to be defined by the financial state you have moved to. It is handy to learn how to return to your more humble roots whenever the situation warrants it for a month or so (or whatever) during lean times. Humility can be critical.
Being able to shift yourself up and down the “spend ladder” as needed is important. Your level of debt is therefore an important aspect to not over commit, so you do not become overly constrained by it. As your money increases along with your age, the level of appropriate debt to equity will change. Increase your savings/investments accordingly. Get advice on the specifics for your own situation from a really good registered financial planner.
Please contact me if you would like some assistance in applying any of this in practice.