Cash Is King. What’s True for Business Is Also True for Your Private Household
How to use an entrepreneur’s cash flow plan template for your private household
Cash is king — an old saying that nothing else matters in business. No cash, no business.
The same is true for your private household: No cash, no food on the table.
Still, so many companies are fueled by investor money, and so many private households are running on mortgages and debt.
Don’t get me wrong, I’m not against investor money or debt in general. But looking at the current economic times, I think it’s worth considering changing our financial behavior, both for businesses and private households.
The Times Have Changed
Every entrepreneur maintains a cash flow plan — no matter if your company is VC funded or bootstrapped.
However, how many private persons do you know that maintain a cash flow plan for their household?
Well, why not apply entrepreneurial common sense to your household? Many a household’s budget is comparable to a small business, and running a household like a business sounds like a good idea in challenging times.
Here is what I would suggest needs some rethinking.
1. Forget The Static Budget
In the good old times, people would create a budget for the next year, and then somehow try to stick to it. In recent times, with all the turmoil, who says you will still have a job by the end of the year? And who says costs for certain goods such as energy or gas won’t explode overnight, not respecting your beautiful annual budget?
At the end of the day, cash is the only thing that matters. That’s why I would advocate a forecast-based cash flow plan rather than a static budget.
2. Forget Non-Profitable Growth
Investors and bankers are nervous. Nobody wants to fund growing companies nowadays, and the same is true if you want to take out a new mortgage for your home.
So, if you need investor money or a new mortgage, you need a compelling case nowadays. Bootstrapping is the word of our times. It means only spending money when you earned it, and not before. And that applies to both business and private households.
Of course, that’s difficult when you need to build a house, an enterprise SaaS product, or anything else requiring 6 or 7-digit upfront investments.
However, many 5-digit expenses can wait until you have your money earned: A new car. Refreshing the paint in the living room. That crazy expensive holiday.
In the endless party days of the 2010s, when money was cheap, many people funded their consumerism with cheap debt. That’s a thing of the past now — and maybe this is good news in a wider context.
Cash Flow Strategies for The 2020s
One of my board members has a saying:
Business is really easy: increase revenues, and decrease costs, and you will be fine.
Whilst this might sound over-simplified, it’s true. And the basis to get it implemented is the cash flow plan.
Here is what I did for my household.
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1. Create A Cash Flow Plan
My household cash flow plan is an exact copy of my company cash flow plan. It is one large Excel sheet, where all income streams and cost items are summed up in different tabs.
The difference between income and costs each month will give you the cash flow. If you earn more than you spend, the cash flow is positive. If you spend more than you earn, the cash flow is negative.
Adding each month’s cash flow to the liquidity level of the previous month gives you a projection of your liquidity. I would suggest extrapolating your liquidity for 3 years — in this way, it’s easier to see if your earning/spending behavior is sustainable or not.
At the end of each month, compare the projected liquidity with the actual balance of your bank account. In this way, you can see if your forecast was accurate or not.
2. Visualize
The power of Excel comes from charts. If you followed step 1 above, you can easily visualize projection. And whenever you make updates to your earnings and spendings sheets, the chart is updated automatically. In this way, you can optimize your cash flow plan easily and see the effects of each cost-saving or income increase.
Here is an example of an unsustainable cash flow plan:
You can see that with the current level of income and spendings, liquidity will last only until June 2024.
In the VC world, you would do a financing round before mid-2024. In the private household world, this won’t be possible. So you will have to get your earnings and spendings into balance. Use the Excel cash flow plan to play around until you get to a sustainable path:
3. Update And Optimize
You could stop it right here — hey, I managed to get a sustainable liquidity projection together.
Don’t.
I update my cash flow plan at least once a month, rather than once a week. Whenever a new cost item appears, I’ll map it in my Excel sheet: One of your kids needs teeth correction? Unplanned maintenance of your heating system needs to be executed? All those items will affect your liquidity, and the chart above will show immediately if they will get your cash flow projection away from the sustainable path or not.
4. Compare Forecast vs. Actual
Last but not least, compare your actual liquidity to the forecasted liquidity at the end of each month. Are you doing better or worse than planned? Did you experience any sudden, unplanned changes in income or spendings?
I prefer to plan earnings conservatively, and spendings generously. In this way, my liquidity forecast is typically too pessimistic.
As a result, at the end of each quarter, I decide what to do with the excess liquidity. And in these times, I normally pay off some of my mortgage.
Growing a company 📈 in troubled times 🔥🧨 is a marathon.
As a tech entrepreneur 💻, active reserve officer 🪖, and father of three 👩👦👦, I can help you with 👉 practical entrepreneurship and resilience advice for all aspects of life. To the point 👌, no fluff, because entrepreneurs are busy.
When I’m not busy, I get my rest and inspiration in the beautiful mountains 🏔️ around Zermatt 🇨🇭.