A dangerous situation occurs when the manager of a business does not understand that the balance of the business bank account is not the cash balance of the business. Even if the financial statements of the business show that the business is profitable, the business still may not have enough cash to continue operations. If a business is making last-minute moves to create more cash, such as emergency loans (usually at a higher interest rate), out of the normal course of business collection efforts, or, worse, laying off employees, there is a good chance the manager is managing cash flow from the business bank account not the actual cash balance of the business.
The bank balance and the cash balance are two different forms of cash. Rarely will the two ever be the same. Reconcile the bank balance, do not manage from it. Cash flow from normal operations is sales revenue less cost of goods sold, other costs and taxes. Knowing the cash balance of the business requires up to date and accurate accounting. Moreover, an effective manager must predict the cash needs of the business in time to prepare for liquidity problems.
Here are some processes to put in place to establish effective cash flow management:
1. Create a cash flow analysis spreadsheet. Set up a spreadsheet to predict potential cash needs in advance. The spreadsheet should have a date for each column, generally the day you plan to pay bills. Dates are typically weekly for the next six weeks and monthly out to 12 months. The rows consist of: beginning balance for the sheet and a formula for each column; an array and total for cash receipts (include revenues and cash from outside sources such as loan proceeds and capital contributions); an array and total for expenditures (expenses, capital expenditures and loan payments); ending balance formula (balance transferred by formula to beginning balance of the following column). Limit the number of rows in major categories to keep making a projection manageable. Typically there are 3 to 5 cash receipts lines and 10 to 20 expenditure lines. Accounts receivable and accounts payable reports are considered with receipts and expenditures that do not go through these systems. This will show the cash balance now and the cash balance projected at milestones out to 12 months.
2. Develop budgets. Under best practices there will be a strategic plan containing projected accounting statements. From these statements and from the operating plans created to realize the goals and mile stones of the strategic plan, there should be budgets based on a realistic review of past performance and reality using the general principle of underestimating revenue and overestimating expense. These budgets, once the cash flow spreadsheet indicates the budget is unrealistic, will need revision as will the strategic plan. The budget must establish the profitability of the business – revenue must exceed expenditures. Having cash on hand does not guarantee profitability. Expenditure decisions should begin with a forecast of profitability – not a quick look at the bank account to see if there is enough cash at that moment.
3. Manage account receivables. Make sure the basic processes are in place: receive payment before or on performance if possible, bill on or before performance, consider discounts for early payment, verify the receipt of billings or invoices (confirming payment will follow), mark a follow-up date if payment is not received and on that date contact the customer for payment arrangements, deposit checks immediately, and be very careful about extending credit to customers (analyze each extension of credit with current information and document contracts against an established credit policy).
4. Manage account payables. Pay bills on time to avoid finance charges or penalties. Ask vendors for terms longer than 30-day terms rather than be late. When cash is tight, weigh each payment’s importance and delay those that are least essential to the business. Examine payment options such as paying at the end of a term with a credit card so that the cash expenditure is delayed for up to 60 days.
5. Manage inventory. To have good cash flow, there must be sufficient products and staff for customers’ needs, but not at excessive levels that consume too much cash. Use vendor and supplier terms and financing (for example, 90-day inventory floor financing). Make informed decisions about how much of a certain item to order – and when. Inventory that is not being transformed into cash is useless. If you have out-of-date inventory, the best strategy is to sell it for the best price you can.
6. Working Capital Cycle. Working capital is a financial metric which represents operating liquidity available to a business. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Net working capital is calculated as current assets (including inventory) minus current liabilities. Since the three major elements of working capital, accounts receivable, inventory and accounts payable, can all be expressed in days, they can be collectively expressed as the working capital cycle. The working capital cycle is equal to the average days of an account receivable plus the average days of an inventory item minus the average days of an accounts payable. While the working capital cycle number will varies from industry to industry, it should remain fairly constant within the business and should not vary much seasonally. When business slows, the dollar balances of accounts receivable and accounts payable should drop significantly but inventory dollars may drop more slowly. To keep the working capital cycle constant and cash flow healthy, manage collections aggressively, plan ahead to reduce inventory before a slowdown, and extend payments to offset slower inventory turns.
7. Maintain marketing. Marketing and advertising are the last budget items that should be cut in dire circumstances. Marketing efforts should be a constant of business operations.
8. Establish credit lines. Many business owners underestimate cash needs by assuming future profits will occur. Work with bankers to establish long-term, low-interest loan access for more credit than you need when times are good.
9. Establish a reserve. Prepare for the future with at least three months’ worth of company savings in interest-bearing accounts. Some businesses accomplish this by saving a certain percentage of revenues as a matter of course.
Managing cash flow requires current and accurate accounting information placed in an understandable spreadsheet that allows the business manager to know the current cash balance and projected cash balances. Managing cash flow from the business bank account leads to dangerous, if not fatal, liquidity problems for the business.
It’s not a big secret-you can learn and use the HAMP approval guideline formula when preparing your own loan modification application. Even if you know nothing about mortgages or how to apply for a loan workout, the federal plan has standard guidelines that every bank uses to determine who qualifies. So it just makes sense to know what those guidelines are ahead of time-that way you will be able to prepare an accurate and acceptable application for your banks approval.
Learning how to do a HAMP loan modification can take just a couple of hours-believe me it is time well spent. Your home could be on the line so if you are willing to invest a little bit of your time your results can be amazing. The FED wants to save your home, but you must be able to prove that your financial situation fits into the Federal guidelines. The good thing about HAMP is that the same formula is used for all borrowers-so your job is to prove with your financial statement and hardship letter that you fit into those guidelines and therefore deserve a loan modification.
Here is what you must prove to your bank in order to have the best chance of HAMP loan modification:
You live in the home as your primary residence
Your loan amount is less than $729,750
You are facing a financial hardship situation
Your current mortgage payment equals more than 31% of your monthly GROSS income (including taxes, insurance and any HOA dues)
You can prove your income with paycheck stubs, or a P & L for self employed borrowers
Your loan must be able to be modified using the standard HAMP loan modification methods-this is called a Waterfall Method-to reach your target payment. The target payment is your new modified loan payment. Here is the basic loan modification formula:
Determine your target payment by multiplying your gross household monthly income by 31%
Subtract your monthly property taxes, monthly insurance and any HOA dues-that figure represents your Principal and Interest target payment
Modify your current loan to meet that target payment by reducing the interest rate to as low as 2%, extend the term to 40 years, or defer or forgive principal balance
It is critical to prepare your financial statement correctly so that you know that your income and expenses that you show your lender prove that you fit into the HAMP loan modification formula. Sometimes you just need to make minor adjustments to your budget in order to qualify-but you need to do this before your bank reviews it and turns you down. If you are not sure how to correctly prepare your financial statement, you may want to use a software program that is designed specifically to help borrowers apply and qualify for HAMP. It will do all the pertinent calculations for you automatically.
In 1969, Elisabeth Kubler-Ross introduced the five stages of grief in her book “On Death and Dying”: Denial, Anger, Bargaining, Depression, and Acceptance. If you have a large student loan balance, then you’ve probably experienced some “grief” and are no stranger to the five stages. If you are in the “Acceptance” stage, this article is for you!
Being in the Acceptance stage is a good place to be. It means that: you have discovered that deferrals and forbearances are not forever (Denial stage), you have stopped blaming others for getting what you assumed to be a “free ride” (Anger stage), you have learned that you can not discharge your loan through bankruptcy (Bargaining stage), you have stopped drinking heavily and watching re-runs of the Gilmore Girls (Depression stage), and you now accept your financial responsibility and are prepared to do something about it. You are not going to find any “magic bullets” in this article, but you will find an effective strategy for paying off your loan in the shortest amount of time.
Step 1 – Organize Loan in a Spreadsheet
To better manage your student loan, you must completely understand what you are up against. Creating a spreadsheet will give you insight into how your loan works and show you the positive results of making extra principal payments. To create a functional spreadsheet, you must understand the terms of your loan and know how to organize this information into a spreadsheet. If you are not a spreadsheet user, you will find that learning the basics is easy.
To begin building your spreadsheet, you will need the following information about your loan: current balance, interest rate, payment amount, and how the interest is calculated. This will allow you to create an interactive spreadsheet that will calculate how much interest accrues daily and provide you with a daily balance.
How the interest is calculated may require some digging. You will find this information by reviewing your loan documents, going to the lender’s website, or calling your lender’s customer service number. The number of days used to calculate interest on a loan is known as basis. For example, a mortgage is typically calculated using “30/360″, which means a year is assumed to have 360 days and a month is assumed to have 30 days. Thus, when you make a mortgage payment, your interest will be based on 30 days. Student loans typically use the actual number of days in the month and a year with 365 days (actual/365). Some loans may use an actual/365.25 convention; each loan is different. On a loan with an actual/365 basis, you will pay less interest in a short month (one that has less than 31 days) than in a month with 31 days.
Feeling lost yet? Don’t worry, because once we put it all together it will make sense. I’ll also explain how to test your spreadsheet to make sure it’s functioning properly. The initial setup of a spreadsheet is the most challenging step.
On the top of your spreadsheet, insert the key pieces of information regarding your loan, such as: beginning balance, interest rate, monthly payment, payment due date, and the interest rate factor. The interest rate factor is the interest rate divided by the number of days in the year. Again, every lender and type of loan is different in terms of how many days in the year are used. The informational part of the spreadsheet is important because you want to clearly see the variables that impact your loan.
After you input the key pieces of information, you can begin the construction of your interactive spreadsheet. Your goal is to create a spreadsheet that shows when each payment is posted, how much of each payment is applied to principal and interest, and what the ending (or current) balance is. The column names that you will create are (from left to right): Payment Date, Principal, Interest, and New Balance. Below is a more detailed explanation of these columns:
• Payment Date – This is the date that your payment is actually posted to your account. This is critical since the interest on your student loan is likely based on the actual number of days between payments.
• Principal – This will be a formula that equals your payment amount less the interest portion of your monthly payment. It’s the part of your payment that will be applied to reduce your balance.
• Interest – You need to know how your lender calculates interest on your loan. Typically, it is based on the actual number of days multiplied by the previous month’s balance multiplied by the interest rate factor. Your Excel formula will be: (current payment date minus previous payment date) x previous month’s balance x the interest rate factor.
• New Balance – This is equal to your previous month’s balance less the principal portion of your current payment.
If your lender has a website that allows you to see information about your loan and/or make payments, establish online access immediately. Print the balance history of your loan and begin building your spreadsheet using your first payment as the starting point. The balance history should show how much of each payment was applied to principal and interest. This is how you can test your spreadsheet to make sure it is working properly. Check to see if your formula results match the history on the website. If they do not match you will need to troubleshoot to figure out why. It could be that the lender made an error, but more than likely the error is on your spreadsheet. If you have a friend or family member who is an Excel user, see if they can give you some assistance. The web is a great resource as well.
The real power of a spreadsheet is that you can simulate what-if scenarios easily. For example, let’s say that you receive a large cash windfall. You can input this figure into your spreadsheet and easily see what the results of such a big pay-down would be. You might learn that if you made this extra principal reduction payment your loan would be paid off in ten years instead of 15. You may find this very motivating. However, if you don’t have a tool such as a spreadsheet to generate this type of information, then you might choose do something else with your money.
Step 2) – Strategies to Accelerate Payoff
Congratulations on building a spreadsheet where you can track your student loan balances and payments. Tracking a loan in this manner gives you control over the loan. Getting a statement in the mail every month and not really understanding why your balance moved so little is not motivating and adds to a sense of hopelessness (and you really don’t want to go back to the cheap beer and Gilmore Girls re-runs). Here are some specific strategies to help you pay off your loan quickly:
Pay a little extra each month – We’ve all heard this before, especially when talking about mortgages. Well, the same holds true for student loans. When you make a monthly payment, part of that payment is applied to interest, and the rest to principal. My suggestion: Pay the amount of extra principal that will result in your loan balance having two zeros at the end of it. For example, if your balance will be $37,845.21 after you make your next payment, pay an extra $45.21 to make you principal balance $37,800. Getting your loan to an even hundred dollar figure is a strategy to encourage you to pay extra each month.
To facilitate this strategy, I suggest you pay your loan electronically. You have no control over when your payment is posted when you mail it. When you make an online payment, you typically select the payment post date. In addition, there will likely be a section to input the extra amount of principal you wish to pay.
The benefit of paying more than your minimum payment is that when you make your next loan payment, a bigger portion will be applied towards the principal and less towards the interest (compared to if you did not pay extra the prior month). If you continue to pay more than the minimum due, this effect will be compounded each month. The result is that you will pay off your loan significantly faster than if you only made the minimum payment. That is because as your balance decreases, the amount of interest you pay decreases. More of each payment will be applied to reducing the principal. This effect is easy to see when you track it on a spreadsheet, which is why doing so is an effective strategy.
Make a plan to pay “a lot extra” on a regular basis – If you get a tax refund each year, apply it to your student loan balance. This will have a tremendous impact on how quickly your loan is repaid. If you get a bonus each year, apply that as well. Any windfall, or instance of “found money”, should be used to reduce your balance. It is not uncommon for people to treat “found money” differently. “Found money” is often wasted on “splurge” items. Resist this urge! Use any extra money, no matter where or how you got it, to pay down your student loan balance!
In summary, the steps needed to help you pay off your loan quicker are:
1) Utilize a spreadsheet to track your loan so that you can see how much of each payment goes to principal and interest. Perform what-if scenarios so that you can see the impact of paying down your loan and formulate a strategy for doing so.
2) Pay a little extra each month. One strategy is to pay an extra amount such that your balance is an even increment of $100.
3) Commit to making large payments when you have a cash windfall, such as an income tax refund or bonus. While this may not provide an immediate reward, the long-term consequences will be sizeable. Time truly does fly, and what may seem like a huge balance now can be reduced to zero in a lot less time than you think, but only if you make it a priority and a goal.
Paying off a student loan can seem overwhelming. However, if you employ the strategies provided here, you’ll learn you can succeed more quickly than you ever imagined. You can apply these same ideas to your mortgage and other loans. Gaining control of your finances is empowering. And by the way, I started this article by referencing the five stages of grief. If you die, please know that in most cases your loan will die with you – unless you consolidated with a spouse. In that case, unfortunately, the loan will live on!
If your car insurance is due for renewal and you are considering buying another policy then this article will provide you with important facts that you should know about. Car insurance policies are getting increasingly expensive and you should do all that you can to reduce your costs. How much you have to pay for your car insurance is dictated by a variety of factors as they apply to you and your vehicle.
In this article we will examine coverage limits, your age, gender and marital status, your location and insuring other household members. All of these factors will have a great influence on how much you will have to pay for your policy.
Coverage limits are generally dictated by the price that you are willing to pay for your insurance. A higher level of coverage will generally result in higher premiums. The best way to find a good value policy is to comparison shop. Nowadays it is generally accepted that the best way to do this is by using a car insurance comparison website.
Your age, gender and marital status will have a great effect on the auto insurance rates that you are offered. Insurers rate drivers using a variety of criteria, if you are a young single male driver you will usually have to pay higher rates. If you are a middle-aged female married driver then your rates will be lower. Insurers calculate the best car insurance rates for you by comparing levels of risk. Those groups which are statistically more likely to be involved in an accident have to pay correspondingly higher rates.
Location plays an important part in deciding how much your premiums will cost. Drivers who live in an urban environment will usually pay more than those from a rural area. This is because drivers who live in cities and heavily populated areas are more likely to be involved in an accident, or to have their car stolen or vandalized. Insurers generally offer better rates if you’re able to demonstrate that you keep your vehicle in a garage at night. You may also be able to improve the security arrangements of your automobile by fitting an alarm, immobilizer and steering wheel lock.
Insuring other household members will have an influence on the cost of your policy and the best car insurance rates that you offered. If you have teenage family members living with you and they are added to your policy, then your costs will increase. This may still work out cheaper than if your teenage driver were to have a separate policy in their own name.
In conclusion, there are a variety of different factors which can affect your ability to be offered the best insurance rates. Some of these are coverage limits, how old you are, whether you are male or female and whether you are married or single. Your rates will also be affected by the area where you live and whether other household members are included in your policy.