In this interview with Doug Peterson, we delve into the vital concepts of personal and small business cash flow management. He says that you cannot deal with inflation and limit lifestyle creep without having a system to know where you are.
Doug sheds light on the significance of shifting from reactive financial practices to proactive management, emphasizing the need to anticipate and allocate funds for infrequent expenses. He shares real-life examples of how efficient cash flow management can safeguard both personal and business finances, highlighting the transformative impact it has on individuals seeking peace of mind. Additionally, Doug addresses common misconceptions surrounding personal and business cash flow and offers practical tips for those grappling with challenges. If you’re looking to gain better control over your financial well-being, this interview provides valuable insights and strategies to get you started.
Who do you help, and how do you assist them?
I primarily assist high-income individuals and small business owners with personal and business cash flow management. I also work with people going through divorces. Many people struggle with this aspect because it’s not typically taught. I help them shift from being reactive with their finances to becoming proactive. This involves tracking your expenses and helping them plan where their money goes before they spend it, rather than wondering where it went afterward.
One of the key areas I focus on is setting up a system for them to anticipate and manage infrequent expenses. Most individuals and businesses often overlook these costs, which can lead to financial challenges and debt. For instance, people often forget to save for car repairs, which can be significant expenses. To address this, I encourage them to annualize all their expenses. For example, if you own a couple of cars, it’s essential to set aside around $300.00 each month to cover unforeseen auto repair bills, on top of gas, car insurance, and licensing.
But there are many other infrequent expenses to consider, such as vacations, life & umbrella insurance premiums, holiday spending, birthdays, home maintenance, and yard upkeep. The list goes on, making it important to have a well-established system in place to anticipate and manage these costs effectively. My goal is to help individuals and businesses level out their cash flow so that they have the funds available when these expenses arise, ultimately leading to better financial stability and peace of mind.
Why is having a financial management system important?
Having a cash flow system is important because it helps individuals and businesses make informed decisions with their money. Many people often rely on what I call “checkbook budgeting,” where they look at their current account balance to decide if they can afford something. However, a systematic approach that anticipates expenses and allocates funds for planned expenditures throughout the year offers a more comprehensive view of their financial situation knowing how much you have left after you have met all your priorities.
For personal cash flow, I often hear we have a surprise expense nearly every month. Nearly all these surprises are expenses they have year after year.
For example, in the context of small businesses, hiring new employees with the expectation of immediate revenue generation is a common practice. Yet, it often takes time for new hires to become productive. Having funds set aside to cover their payroll for a few months during this adjustment period can be incredibly beneficial. Without such a system, some individuals resort to expensive financing options like relying on a line of credit to fund business growth, which can lead to unnecessary financial strain.
What’s the most significant impact you make in people’s lives through your work?
The most significant impact I bring to people’s lives is peace of mind. Many individuals, often for the first time, gain a deep understanding of their true living costs, their current financial standing, and future financial commitments. Even in challenging situations, clients have shared that having this knowledge and awareness brings them significant relief. However, achieving this peace of mind requires consistency. Spending just half an hour a week to adjust your spending plan is essential. Many people create a budget, treat it as a mere projection, and leave it untouched for months. I prefer to call it a spending plan where you can only allocate the money you have and make small adjustments each week.
I emphasize the importance of reviewing your plan every week, which doesn’t require much time but ensures it takes as little time as possible and allows for necessary adjustments. Unexpected expenses are bound to arise, and since most people tend to react to them, they often hope there’s enough money left when these expenses occur, even though they are not truly surprises—they happen every year. Having a system in place provides the peace of mind that your expenses are covered, and you’ve built a more extended financial runway for yourself. It’s worth noting that JP Morgan suggests that most small businesses can only last about 27 days if their cash flow stops and 57% of Americans can’t come up with $1,000 for an unplanned expense. Also, 33% of Americans who make over $100,000 don’t have an emergency fund. Managing personal and small business cash flow is a significant challenge in our society.
Regardless of your income level, there’s always a way to outspend it. What often happens is people receive raises and gradually increase their expenses and lifestyle. This is called “Lifestyle Creep”. Over the past year, we’ve seen significant inflation. However, those I work with who manage their money carefully examine their actual spending and consciously manage it. For instance, food costs have risen considerably, but our grocery budget hasn’t changed; we’ve simply made different choices. When you’re unaware of your financial situation, you’re essentially guessing and flying blind and when you overspend a category and don’t cover it from another category, you increase your overhead. However, if, for example, by the 21st of the month, you’ve already spent three-quarters of your grocery budget, you can make adjustments. Without awareness, you won’t make those necessary changes.
Events like Christmas can lead to overspending when guests come over, and it can quickly spiral out of control. Therefore, we track every aspect of our finances, and that’s the essence of the system. It’s a simple behavior change, instead of spending money and going on with your life, you take an extra 10 to 20 seconds to jot down the expense in the app on your phone. This way you know exactly what you have spent in real-time. Also, this way, you won’t accumulate a pile of untracked expenses to categorize later that you will never get to. However, it’s essential to acknowledge that any change can be challenging for some people to embrace.
Is the financial management system different for small businesses compared to personal finances?
Not really, the core concept is quite similar. In both personal and business finances, you have money coming in and money going out. The key is to ensure that you have more money coming in than going out. It is also important to build an emergency fund.
For businesses, it follows the same principle, but with the additional goal of building up reserves and creating a financial cushion. I encourage people to aim for having three months’ worth of personal income saved and an additional three months’ worth of business income saved. This provides a buffer in case unexpected challenges arise and they will. That means allocating the money in advance for those expenses so you know you can cover them.
Many individuals, even those with a good education, tend to spend money as soon as it comes in, often without realizing that they’ve already allocated those funds for various financial commitments. So, it’s not about having extra money; it’s about effectively managing the money you have across different categories to ensure financial stability, whether it’s for personal or business purposes.
What are some myths or misconceptions surrounding your work?
Certainly, there are a few common misconceptions about what I do. One of them is the belief that it requires a lot of effort, but in reality, it doesn’t. People often spend a significant amount of time worrying about money when, with an effective financial system in place, they end up thinking about money much less.
Another misconception is that I will tell them how much they can spend. What happens is that when they see where their money is going, it is easy to eliminate waste and fund their priorities.
Many people experience tension in their relationships. I’ve found that transparency with one’s spouse or partner is an important aspect and feedback from clients highlights its importance. It makes a huge difference in my marriage as well. People no longer struggle with discussing money, and it’s no longer an emotionally charged topic. Instead of emotional arguments about overspending or we can’t afford it, it becomes a more logical conversation focused on decisions like, “Which category should we take money out of or allocate this money to?” This shift can make a significant difference, not only in marriages but also in partnerships and business relationships, as it encourages discussions based on facts vs feelings or opinions.
Another misconception is the belief that simply earning more money will solve all financial problems. While increasing income can help, there are many cases where individuals haven’t built up any financial reserves because they’ve been focused on boosting their income and have become accustomed to living up to their current means. This is commonly called lifestyle creep.
Could you share an example of how more efficient cash flow management benefited a recent client?
Certainly, I can provide examples from both the small business and personal perspectives.
On the small business side, I worked with a client who owned 26 different properties. While it may sound like a substantial portfolio, it was managed by just two individuals with a few employees. They had set up limited liability corporations (LLCs) for each property, which is a smart approach for legal protection. However, they had commingled their funds among these properties. They would borrow from one property and use it for another without properly documenting these transactions or creating notes to keep them separate. This commingling of funds essentially eliminated the protection that the limited liability corporations offered. From a legal perspective, they were treating all these properties as a single financial entity, making them collectively liable. This put hundreds of thousands of dollars at risk due to the way they managed their cash flow. The simple solution was to treat these transactions as loans between the LLCs, thus maintaining legal separation and protection.
On the personal side, I’ve encountered various situations. One memorable case was a woman who was spending a staggering $55,000 per month on personal expenses and was struggling to reduce it to $41,000. It may sound surprising, but such scenarios are not uncommon. I also had another client who was going through a divorce and claimed that his wife had spent $30,000 on groceries in a single month.
In many cases, the underlying issue is that people earn good incomes but find themselves with little left at the end of the month, wondering where it all went. Most financial planners will tell you that people tend to underestimate their actual spending by about 50%. They may recognize they earn $18,000 a month but struggle to account for the other $9,000. They might mention major expenses like buying a car, traveling to France, or building a deck, but they often lack clarity on how much they spend on various categories and smaller purchases.
What do you believe prevents more people from seeking the help you offer?
I think two main barriers discourage people from seeking the assistance I provide. Firstly, my service is somewhat unique and they are not aware it exists. I am not a financial planner who sells financial products, creates long-term financial plans, or manages investments. When people think about getting financial help, they often imagine working with a financial planner, which can be valuable if you have substantial assets. However, many individuals are unaware that professionals like me exist who can assist with day-to-day cash flow management. There aren’t many people who do what I do, so awareness of this alternative approach is limited.
Secondly, there’s a significant misconception that we should inherently know how to manage our finances. People often underestimate the complexity of effective cash flow management, assuming it’s as straightforward as paying bills and setting up automatic payments. However, that’s more about reacting to financial demands rather than actively managing cash flow.
The second barrier is a pervasive sense of shame. Many well-educated professionals feel embarrassed about having someone scrutinize their finances or asking for help. This shame can be a substantial obstacle to seeking assistance, even though cash flow management skills, like the ones I teach, are not difficult to learn. It’s similar to the first time someone used email or worked with new software—they didn’t know how to do it until they learned, and the same applies to cash flow management skills. Most people struggle with overcoming the shame associated with seeking help and shedding light on their finances. It is an important step in the process.
Can you share some tips or strategies for individuals struggling with financial challenges?
Certainly, here are some practical tips and strategies to help those facing financial challenges:
- Utilize Budgeting Apps: Consider using budgeting apps like YNAB (You Need A Budget). These apps are excellent for tracking your finances and creating a budget. They not only monitor your spending but also allow you to allocate funds to different categories until you reach zero. I assist people in properly setting up and effectively using these apps.
- Track Your Expenses: Start by keeping track of where your money is going. There are various budgeting applications available, many of which are affordable or free and I recommend YNAB. This will provide insight into your spending habits and help you plan for future expenses. For example, if you want to save $1,200 for next year’s holiday season, you should set aside $100 per month starting now. The app allows you to set aside money in virtual envelopes.
- Only Spend Money You Have: You allocate your money until you don’t have any left to allocate. With this spending plan, you will not accumulate debt, and allow you to pay off credit cards in full every month.
- Save for Infrequent Expenses: Plan and save for infrequent but expected expenses, such as holidays, home maintenance, and other irregular costs. This will prevent financial surprises and improve your cash flow management smoothing out peaks and valleys in your expenses.
- Reduce Financial Stress: Recognize that financial stress can strain relationships and overall well-being. Implementing an organized financial system can significantly reduce this stress. Money is a common source of tension in relationships, so addressing it proactively can enhance your personal and family life.
- Schedule Financial Reviews: Weekly review your spending plan at a set time and place. During these sessions, assess your spending, make adjustments to your budget, and ensure you’re aligned with your financial goals. This proactive approach helps you stay organized and minimizes last-minute financial pressures.
- Batch Administrative Tasks: At your weekly review, also deal with your administrative tasks to improve efficiency. For instance, review and pay bills, plan family activities, and address home maintenance tasks in one batch to reduce time and effort spent on administrative work. Nobody wakes up on Saturday morning or gets married to do more administrative work. Having a weekly meeting with your partner or spouse or just by yourself keeps you proactive and reduces missed deadlines.
Remember that cash flow management is a skill that can be developed and enhanced over time. By implementing these tips and strategies and seeking assistance when needed, you can gain better control over your money and alleviate unnecessary stress.
As Doug mentioned in the first paragraph. you cannot deal with inflation and limit lifestyle creep without having a system to know where you are.
What should someone do if they want to get in touch with you for assistance?
If you’re interested in reaching out to me, the easiest way is to go to schedulewithdoug.com.
There you can access my website, calendar, email, and phone number. Please feel free to schedule a “get acquainted” meeting at a time that works for you. During this meeting, we can have a confidential discussion about your financial goals and challenges to determine if working together would be a suitable fit for your needs. I’m here to assist and provide guidance as needed.
