Tuesday, May 22

How to React When Life Doesn't Go as Planned

As I mentioned on Friday, I had a huge and unexpected tax bill that will be creating a cash flow problem for me in the not-too distant future. Fortunately, this problem is not insurmountable, and I thought it might be useful to work through the process on my blog.

1. The Situation

Daily expenses require cash flow:

  • I have just written several large cheques.
  • I have certain known expenditures that are upcoming in the next 30 days.
  • I also have an approximate idea of what my regular spending entails.
  • I am also going on vacation and need to budget for extra costs related to that.

Bank balances are not adequate to cover these expenses:

  • I keep only the minimum in my personal accounts, but there is a little extra left from the sale of my car.
  • I have recently moved a large sum into my corporate trading account. That has left my operating and savings accounts too low after the unanticipated tax expense.

2. The alternatives

Increase funds available for spending:

  • Work on collecting unpaid invoices from clients
  • There is enough cash in the trading account to cover the shortfall. It could be withdrawn but it may take several business days.
  • Set up a line of credit. This may also take several days.
  • Use a credit card for certain large expenses to bridge the gap.

Decrease expenses:

  • Unfortunately this may not be adequate on its own due to the large irregular expenses, but a drastic cutback could be a strong contributor to reducing the amount of additional funds required.

3. My Response

In looking at the situation, I have concluded that I probably put too much money into the trading account in an aggressive saving move, when this money was still needed for cash flow. Given that I am about to go on vacation, I don't think that the drastic expense cutback is a pleasant alternative. However, the possibility of collecting some unpaid invoices from my clients is quite possible.

So my first step was to get in touch with the worst offender and negotiate a discount (which they were asking for anyway) contingent on them paying by the end of the month. While they haven't come back with a firm answer, I believe that they will go for this option and this may in turn take the pressure off.

In the meantime, my backup plan will be to use my credit card for my upcoming health expense, which will buy me some time for some other invoicing to come in. I am also of course going to be much more vigilant about maintaining plans for adequate cash flow, even though I believe this was an extraordinary set of circumstances all falling in the same time period.

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On another note, the 3rd Canadian Tour of Personal Finance Blogs is now up at Canadian Capitalist's website. Be sure to visit and be a tourist in the CanPF blogosphere!

3 comments:

Thicken My Wallet said...

Too bad to hear about the cash flow crunch. If you have a good history with your bank, a LOC shouldn't be too hard to set up (or perhaps get a larger over-draft). Financing through a CC seems like a last option.

FourPillars said...

I think the LOC is the best option. They're pretty useful to have around sometimes.

Mr. Cheap said...

LOC are great! TD offered me one out of the blue for $10K (once I'd made sure there weren't any costs associated with it other then the interest, I said "why not?"). Recently when I was doing some telephone banking the rep upped my limit to $20K.

I don't like the Prime+2.75% interest rate generally, but for short term stuff like this, why not? If you can save yourself the mental effort of bouncing stuff around for a couple of bucks in interest over a week, why not?