I think it's important to take a look at your cash flow pattern throughout a year, so that you can plan out a budget or simply have the cash ready for big payments in certain months. I know, nothing ever works according to plan, but knowing what will definitely happen and what can happen is the first step to navigating this world that is full of uncertainties.
Certain category in my monthly cash flow are fixed. I don't ever want to think about situations where I can skip such expenses. These include parent's allowance, home mortgage, utilities etc. There are others that are more optional in nature. Things like travelling or buying luxury items are not exactly needs but is good to have. I've some insurance payments that are annual, so during certain months, my cash flow out will be very high. I just have to make sure that I have enough liquidity to pay off them when the bill comes in. That's an advantage in paying premiums annually because you get some discounts from doing so rather than doing it on a monthly basis. Harder to pay one lump sum per year though, I must say.
I think my job as a self employed tutor makes it harder to plan. That's because my pay also varies depending on which month you are talking about. Hence, it's even more important for me to watch my cash flow like a hawk, because I could really have liquidity issues especially in those months where I know my expenses will be higher. How do I know which months I will having higher expenses? There's no other way to know but to track your expenses over several years.
Here's how my cash flow expenses looks like in a typical year:
You can see that Apr and Oct are dreaded months for me. It's so high because of the annual premiums that I have to pay for my insurance. Jun and Dec months are higher because of possible travel plans. Feb is higher because that's when most Chinese New year occurs, so a lot more is spent on meals and ang baos etc. Other than that, most of my expenses are pretty fixed. Mortgage, parent's allowances and food takes up a lot of my monthly cash outflow, easily 70% or so in a general month. I can only dream of the day that my mortgage payment is finally finished! On average, my expenses are around 3.5k per month, all inclusive.
A long time ago, I blogged about the variability of my income
. Here's the chart:
Most of my income stream will come in only around Feb period, peaking around Aug to Oct period. After that, my 'winter months' will come from Nov to Jan, where I'll be pretty poor. That's why I need to save voraciously during my fatter months so that the excess can be used to offset my leaner months. Whether I have the income or not, I still have to pay off my fixed expenses.
Just looking at the two charts I'll be able to work out a cash flow plan in my mind. It's quite simple - make sure you have the money to pay off each month! It's important to note that while it's good to have a figure for the average monthly income or average monthly expenses, it's not so good to use these figures for month to month living. If you have a room with two persons, one being 1.8m and the other is 1.5m in height, there's no use knowing the height of an average person in the room when you want to tailor-make their clothes, because such a person with the average height doesn't exist! Likewise, knowing your average cash inflow doesn't help you in knowing whether you have the cash to pay for it.
I think in a way, analyzing a company is the same. It's little consolation in knowing that the income for a company is so high but the cash will only be coming in at a much later date than the debts. This article will round up this series of running yourself like a company.