The strange expectation of becoming financially free without the right kind of financial management skills could be likened to a person dreaming of becoming a pilot without having to take rigorous and difficult calculus needed to calculate distances. The difference however is that it takes much less than we imagined becoming good financial managers than it takes to become a successful pilot.
We all engage in financial management on a daily basis without being aware of it. Where the problem really lies is in the fact that a lot of people tend to be involved in the wrong kind of financial management that end up doing their personal finance more harm than good. You cannot expect to get healed of stomach ache when you take Paracetamol or Panadol. Same goes for managing your finance. Part of the problem of wrongly dealing with our financial problems could be linked to the inability of finance professionals to relate the financial jargons to our everyday life. This gap in knowledge is what this article is set to bridge.
Working capital management is no doubt one of the best ways of releasing funds for our business. Same can be done to our personal finance. Working capital management is the process of striving for a balance between our fixed and liquid asset, long-term and short-term loans.
STEPS TO PERSONAL WORKING CAPITAL MANAGEMENT
Yes, individuals can save fortune by simply managing their working capital effectively, efficiently and correctly. Below are steps that you need to follow in this regards:
- IDENTIFY ALL YOUR ENTITLEMENTS: this is the first thing that any person willing to challenge his or her financial position starts by identifying all assets and sources of income. This is where a lot of people get it wrong and that marks the beginning of poverty and hardship. You cannot make any progress in your quest to better your financial life you do not invest time to identify what your sources of finance are and evaluate how viable they are. An employee for instance who does not take time to figure how much he or she is worth in a month might end up budgeting far more than she or he is worth.
- IDENTIFY ALL YOUR OBLIGATIONS: your obligations are those commitments you have made in the past that requires you to give out resource that has economic value. A good example is your rent. I have seen a man who forgot that he has to make payment for his mortgages before spending on an expensive holiday only to come back meeting a final notice. This might sound strange but they do happen.
- COLLECT LIKE ITEMS: After identifying your entitlements and your obligations, the next step in your personal financial management is to carry out a matching activity. A matching activity includes matching regular income against regular expenditures. The benefit of doing this is that you will instantly know what is left for you to either spend or invest. In fact, this third step is the most important step in the personal finance theory. You probably will not be tempted to buy that expensive gadget if you know that you have very little left in your coffers.
- Arrange to make up for deficit or invest surpluses: ok, this is the point where you really need to flex your financial management muscle. From the task of matching your assets and liability, what is now left is known as ‘networth’. This figure can either be positive or negative. When it is positive, it means that your income is more than your expenses, and this will call for you to make arrangement for the excess funds to be invested profitably. If however on the other hand you discover that this figure is negative, the right and sensible thing for you to do is re-appraise your expenses and eliminate the less pressing needs. If the figure still remains negative, then make arrangement to raise the deficit while you make effort to increase your source of income and reducing your obligations.
- Constantly monitor your portfolio: as far as money management is concerned, no one has found the Holy Grail. The only Holy Grail is the fact that there is constant room for improvement in our personal finance room.
Financial management is a universal right of every living soul that needs to be jealously guarded or face the severe consequence of not taking responsibility. One most striking feature of personal financial management is that it is very easy to learn and that everyone can manage it personally without having to be sophisticated in the financial science. All that is required is the possession of the right quantity of self discipline.
This article evidenced the fact that sound financial management is not an exclusive right of finance professionals. Following the above five steps will be more than enough to see you through your wealth creation and sustainability struggle.