God will do for me what I can’t do for myself but will not do for me what I can do for myself. What I can—and must—do for myself is attend to my finances.
First of all, distinguish between when money is earned, when the debt towards me falls due, and when the money is paid. In January, I earn money. On 31 January, I issue an invoice. On 28 February I receive the money. For cash planning purposes, the most important of these is the date of receipt.
The same applies in reverse to costs: when they are incurred, when the bill arrives, and when the bill is paid.
To report, budget, and forecast, pick one basis and apply it consistently. For a full understanding, all three bases need to be examined. For our present purposes, let’s stick to the cash basis.
Use Excel or another spreadsheet package.
Here are the questions that must be asked:
Each can be asked with respect to the day, the week, the month, the year, and in the long term. Pick what is most suitable. Often the answer will vary depending on the timescale. Be consistent overall, even if the data need to be gathered at another level (e.g. daily costs can be summed and annual costs can be split).
- What is my income?
- What steps can be taken to change my income?
- What steps can be taken to bring forward billing?
- What steps can be taken to bring forward payment?
- If I have customers, do I perform credit checks before extending credit or accepting payment in arrears?
- Do I have a schedule for prompting customers to pay?
- Do I pursue bad debts systematically?
- Are there temporary sources of borrowing?
- What are the rates of interest and other terms?
- Are there temporary or ancillary sources of income?
- What are my costs?
- Which are absolutely fixed?
- Which can be adjusted only by making a structural change?
- Which are stepped, i.e. rise or fall in leaps rather than gradually, based on my conduct and choices?
- Which are variable, depending on my conduct and choices?
- Which are necessary?
- Which are optional?
To answer these questions, careful records need to be kept of all income and spending, including cash spending. Accounts should be reconciled on a regular basis, ensuring that every penny received and spent is accounted for. Pay particular attention to cash, as the records must show what I am spending cash on, not merely the fact I am spending in cash.
On this basis:
- Write a report covering the last year, split by month.
- Devise a budget covering the coming year, split by month.
- Going forward, record income and costs to produce accounts in real time.
- Produce a forecast for the remainder of the year, showing the actuals for the year to date and the forecasted amounts for the coming months, based on the budget but ‘flexed’ to reflect new knowledge acquired from the actuals.
- As the year progresses, write a budget also for the following year, so that I always have a clear picture at least one year ahead.
- Monitor how accurate the forecasting was, so I get a sense of how much I need to discount my own predictions. Occasionally people are over-pessimistic. Most are over-optimistic. Err on the side of pessimism for planning purposes.
If, at any point over the next year, the cash balance goes or might go below zero, i.e. I become technically insolvent and cannot pay debts as they fall due, a set of contingency plans is required. Precisely what will I do? What is the trigger point for each plan or element of each plan?
It is important, in this process, to avoid:
- Missing items
- Double-counting
- Wishful thinking
- A mismatch between different bases.
It is important, also, to build in buffers and contingencies. Income is usually overestimated; costs are usually underestimated.
What is the ideal?
- Step Three: It’s God’s money, not mine. It’s there to support my life not as the purpose of my life. It is not to be used recklessly or chiefly for cheap and transient thrills and comforts.
- Step Four: Take (financial) inventory.
- Tradition Seven: To be fully self-supporting, declining outside contributions.
- Concept Twelve: To have sufficient operating funds plus an ample reserve (two years of operating expenses) at call.
Once I am doing all I can to manage my finances responsibly and work towards this ideal, I can legitimately let go of the results. Until that point, the fear is a prompt to do so.
Having finances in order means I can focus on the real substance of my life, which is serving God (Tradition Five).