22 June 2011

Why Managing Cash Flow is So Important to Your Investment Process? - Part 4

In my previous posts (Part 1, Part 2 & Part 3), I have explained the reasons why managing cash flow is very important to you. In this post, I shall elaborate more in how the cash flow flows in between E, S, B, I.

In part 3, I mentioned that being in at least 3 circles would assist you to avoid any big impact in recession period. It is like a chair where you must have at least 3 legs to support you to sit comfortably. So how does the cash flow flows in between this circles?

For instance, if a employed person (in circle E), he can actually save at least 10% of his savings in his saving accounts or in fixed deposit or in money market fund for at least 6 months. After 6 months, he will see his savings to grow to at least 60% of his monthly savings. The money is like a seed. You can either spend it or grow it to become a big tree. So for him, he can invest in the asset class which he is familiar with (Now he steps into circle I). Of course, if he can get an accountant / financial adviser / fund manager to assist him, the better result he could get as compared to a newbie. As time grows, he grows confident of picking stocks (e.g. properties, stocks, futures, derivatives, unit trusts etc) himself, then he will do it himself because he is the one who understand his risk & return characteristics most. The cash flow now flows in between circle E and circle I. The money grows in circle E (savings in his salary) now flows into circle I (investment). When the money grows in circle I, the cash flow could be flows back to circle E (the person now can invest in his profession to get promotion in his current position to earn more salary income).

Now, once the person get a higher position in his current job, he would think that he will be insecure as his salary is much higher than other colleagues. What should he do now? He would think of putting more cash flows in circle I. However, there is also a risk in circle I as a short term volatility would affect his capabilities to survive in short term. If he would have a mindset of 'sacked by a company and loss a huge amount during recession', then he would start thinking of being in the circle B or circle S.

For some of the reasons, the company actually encourage the staffs to grow their entrepreneurship spirit by venturing into the other profession area. For example, a finance company does not stop their staffs from using their free time to build an online web portal which sells baby clothes. In fact, by building B / S, the staffs will be able to cope with additional requirement by the company. For example, an IT guy in the company now would be able to give some ideas in marketing department although his academic background is not IT.

To be continue....

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