What Is Cash Flow Management And Why Should You Care?

With the exception of volunteer organization cash is the life blood of every company. You know this reality more intimately than you may realize through the monthly expenses and income you experience. Are you living paycheck to paycheck? Or, are you making enough to cover your bills with some left over to put into savings? Being able to manage your cash is not an easy task but with time anyone can master it.

Parkinson’s Law

The difficulty of managing cash can best be understood by taking a look at Parkinson’s Law. The law states; “Work expands so as to fill the time available for its completion”. This idea of resource allocation is no different when it comes to cash. It I may be so bold as to restate the law in terms of cash flow; “Spending expands so as to fill the amount available to spend”. The reason for this I believe is because of the irrational and emotional nature of people. As much as I may not want to admit it my decisions are often based on emotions. People in general have a hard time holding back when they don’t have to. This is also the reason startups with less capital have a higher probability of success over startups that have more than enough capital available to them. The less you have the more intentional you have to be.

Cash Flow Game

Managing your personal finance is no different than managing the finances of a for profit organization. Money comes in and money goes out. Through this cycle either a standard of living is maintained or a profit is produced. Individuals and small businesses alike should understand that cash flow needs to remain positive. To help you with this there is a great online game provided by Rich Dad Poor Dad. I recommend you take a few minutes and try your hand at it. It is available at:

http://www.richdad.com/Rich-Dad-Games/CASHFLOW.aspx
And here is a screen shot:         

I have to admit I didn’t do well my first time around, in fact my first two tries were not successful. I did however manage to break out of the rat race and complete the game successfully. It isn’t a perfect simulation but it is enjoyable and teaches a few ideas on leveraging. The biggest take away is of course cash flow management. To win the game you must learn to obtain and maintain positive cash flow.

It was interesting to play this game having executed a few of its principles earlier this year through the purchase of our first rental house. Without knowing Mr. Kiyosaki’s model we obtained an asset that basically pays for itself. Just as the voice overs say during the game this takes place when you purchase not when you sell. We were fortunate enough to intercept a property that was about to be seized by the county for auction. We purchase the property and then spent 6 months remodeling. When we finished we had a rental with positive cash flow.

One of the other things I like about the game is that as a player you have both an income and expenses. As the game goes on both will fluctuate as cards are drawn and “life” happens. The pace of the game is of course faster than what one could expect in real life but I believe the principles are sound. If you see a game in there titled “ShyEntrepreneur.com” that’s me!

Much can be said about cash flow and personal finance but all I wanted to do here was point out a tool the illustrates the importance of cash and maintaining a positive cash flow situation. My people currently live outside of their means and can’t quite figure out how to progress towards financial freedom. The solution is simple but it is not always easy.
I hope you guys find the game as entertaining as I do and be sure to post comments at the end so others can learn from your experience.

TJ

About TJ

Engineer and Entrepreneur