Alternative Income Source

Let’s consider how a business make money. Have a look the segment information in a listed company’s annual report. You will notice that the company’s operations are split into various segments. This could be geographical, brands, products groups, or customer groups. But the common feature is revenue can be generated from more than one source.

There's a motivation speakers which once said that you should aim to have an alternative income source. This allows you to diversify your risk and increase your earnings.

Your alternative income source can be odd jobs and may not always be recurring. In my view, one of the exciting outcome is it creates new opportunity. You never know where that opportunity will bring you in the future.

If you are thinking of what this alternate income source can be, it should ideally have one of the two elements: (1) It involves something you are passionate about; and/or (2) you can do it more efficiently than others. This allows you to be persistent to endure through the dry patches until opportunities arrives. After all, Rome is not build in a day.

Most people considers investment as an alternative revenue. I recall the countless times someone wanting to sell me an investment product says “let your money work for you”.

When it comes to investments, my view is that we often underestimate the effort required and simply choose to ‘follow’ others advice without doing your homework. To be good at something, one needs to spend time and effort; learning and practising it. Although gut feeling is important, I suggest that you have a systematic principle based approach when it comes to investing (which I will share in my coming post).

Short Term Cash flow risk: Making ends meet on a daily basis

The 15th of every month is always an exciting day for me. It’s the day when I get my salary. However, that excitement disappears very quickly a few days later when mortgage, credit cards and other bills come knocking at my door.

So the question is: are you managing your monthly cash flows effectively?

To answer this question, first you need to understand what are spending. I have heard numerous stories about people complaining that they don’t know where their money went. Start an expenditure diary and record your daily spending. You can start with the simple way of keeping a note book or mobile application in smart phones. The key idea is you can’t manage something you don’t know.

Once you have collected information on your expenditure, you will have a better appreciation of how much money you are actually spending on a regular basis. This then allow you to do something that business typically do. Forecasting.

Forecasting for an individual is not about massive spreadsheet and calculating what you think you will spend to the last dollar. In my view, it is about knowing whether you have enough money in your bank to make ends meet. By doing so, the real benefit is that you have an expectation of how much you can save.

Treasury for the Individual

When you think about ‘Treasury’, one would associate it with the government department who collects, manage and spend public revenue. But if you have watch enough movies like me, you would associate Treasury as a place where king stores its treasurers and valuable in the olden days.

My view is that Treasury is not just for kings, government or the rich. It’s for everyone. Personal finances is a challenge for everyone in its own way. Whether you are repaying your mortgage, saving for an initial deposit for your house, worry about retirement or just planning to go for an overseas trip. money is a vital part of our life.

So what does Treasury and our personal finances have in common? I think that there are fundamental principles and practices in Corporate Treasury which we can used in our own lives. To illustrate what I mean, you need to think as yourself as a business. You generate revenue (monthly salary) and you incur expenses (food, bills, mortgage/rent), and if you are lucky, there’s some profits left which you can accumulate. The key difference, however, is that the purpose of an individual is not only to generate profit, but to also consume goods and services for our enjoyment.

Changing your mindset will allow you to think more strategically for yourself. Most often, we get too caught up in day-to-day routine, that we seldom take the time to reflect and plan for the future.

As a business, there’s two key issues that I would like to focus on.

1. Improving operational efficiency
2. Diversifying revenue stream

So how do we do it? Let me begin by explaining what’s a Treasury function in a business. Treasury function in a business is about identifying the financial risk and managing them. These risks are typically:

• Liquidity (or short term cash flow) risk;
• Solvency (or long term cash flow) risk;
• Market risk (e.g. interest rate); and
• Operational risk.

As an individual, these risks exist in different forms. Are you able to have cash to buy groceries, pay bills and mortgage (or simply making ends meet month by month)? If you have a mortgage, car loan, and personal loan, do you have enough money to pay your monthly repayment? Are you worried about losing your job?

So how does a business (and maybe you) manage these risk? I will be explaining more about it in my next post