Personal Finance – Understanding Personal Income and Expenditure
Published November 4, 2011 | 
“It takes as much imagination to create debt as to create income” quote attributed to Leonard Orr; if this is the case, then why is it that we create debts more easily than an income? well, most of us do, I know I do…I work so hard to create my income but on the contrary I easily get into debts.
In the last 5 years I have found myself getting into more and more debts, the more debts I get, the easier it gets for me to get to the next one and the next. My bank does not help either, the more debts I have, the higher the borrowing rates I am banded in, I guess it is because I am considered as a high risk to the bank.
Then there is overdraft charges, bounced direct debit charges, checks, late payments on my loans, utilities, mortgages all compounding into increasing my debt thus lowering my credit score and consequently increasing my APR…my debts feels like snow ball, free falling from a hill getting bigger by second, getting more and more out of control.
I took upon myself to look back at how I got into debts in the first instance; I knew if I have any chance of regaining control of my finance, I will have to know how I got in. It pays to understand how one gets into debt, and to do so, understanding income and expenditure is important.
Income is any earning that lands at your disposal, it may be money earned through paid employment, as business profit, or from investments. Expenditure (or sometimes known as expenses) is any transaction that takes away your earnings, for instance paying bills, mortgage, loans etc.
Income and expenditure chart, table or write up, (also known as cash flow) is a snap-shot of your earnings versus expenses. It is in essence looking at what you earnings (income), usually monthly against expenses (outgoing). An average person would not bother writing down his/her cash flow.
Using cash flow, it is easy to see how one gets into debt. When income is lower than expenses (also known as negative cash flow), the shortfall (deficit) has to be covered somehow from somewhere and for most of us it is covered by borrowing (loan, credit cards, store cards).
I began to learn that, if I am to avoid getting into debt, I will have to “live within my means”, i.e. at least break even between my income and my outgoing. To do this, I needed to master my will, guts and learn not to be ashamed of where I was, financially.
Most of the time, the pressure of conforming to other people’s expectations (keeping up with Joneses) is the one that gets us to live beyond our means, thus getting into debts. What we don’t understand is, debts have crippling effects and they are addictive in nature.
Robert Kiyosaki in his book cash flow quadrant (2000, p205) rightly said, “people who cannot control their cash flow work for those who can”; if we are to become free, we have to learn to control our cash flow and this begins by WRITING DOWN monthly cash flow account (personal income and expenses account)…it is surprising how those unplanned £5 expenses quickly adds up to £100′s plunging one down into ‘negative cash flow’.
The aim is to take control of the personal cash flow with the objective of creating income higher than expenses, positive cash flow (surplus) and use the surplus to get out of debt, invest to create more surplus and of course to ‘spend’ on pleasure. My personal motto is: “live within my means, then increase my means”, for pleasure, use surplus only…thus, no surplus, no pleasure.
Some Methods of Working Capital Financing
Published November 1, 2011 |
A successful company cannot rely upon the good nature and patience of its personnel and creditors for eternity, and so vague promises that the company will be able to meet their current financial obligations once it turns the corner in monetary terms are not likely to make much impact. With that in mind then, a business must ensure that it has a sufficient level of working capital available at all times in order to ensure that the settlement of debts and liabilities such as the cost of raw materials and wages are met in full and in a timely manner.
A common business error is whereby a company is unable to settle its outstanding debts by virtue of excessive amounts of cash being tied up in fixed assets, such as structures, stock, vehicles etc. Whilst these items are without a doubt, an integral part of the production cycle of the business, the fact that the company has no money to hand will cause problems for them. If the company does not have the money to purchase the supplies and raw materials needed to make the stock, how can they turn a profit?
Therefore, most companies will at sometime or another during their lifetime will need to contemplate and take advantage of working capital financing methods in order to bring their current level of liquidity up to a suitable standard. This dilemma will be particularly acute and prominent in those businesses where the stock they produce is high value, has a prolonged production requirement, and will only appeal to a niche market. Whilst the gross profits that will be earned from such stock maybe significant indeed, such businesses will find that working capital financing really takes the edge off.
There are a number of different working capital financing methods and options available, each with their own respective benefits and drawbacks. Whilst by no means exhaustive, the following list is intended to provide a brief overview of some of the more common methods of securing capital financing, in order to empower the business owner with their ultimate choice.
Business loans
Benefits
The business will be provided with a capital sum of cash of a fixed amount, which can then be used to help expand the business, or purchase additional raw materials. Adherence to the terms of the loan will ensure that the credit rating enjoyed by the company will increase and improve. If the company currently faces litigation for nonpayment of debt and or breach of contract concerning their non-payment, then a business loan can ensure that a lengthy and costly legal battle can be ultimately avoided.
Drawbacks
Non-compliance with the repayment schedule means that the company will run the risk of having the assets secured as collateral being seized by the lender. Defaulting on the loan will damage the credit rating of the company, thereby making it more costly and difficult to secure additional finance. Interest rates can be rather high, and effectively leech the company of money that could be better spent and utilized elsewhere.