I attended a cash flow convention in San Francisco that was an eye opening experience. Often we look at what we do with tunnel vision. Opening ourselves up to other businesses and people permit us to see the relevance of what we do and to view what we do with a different perspective. That's what happened at this convention.
Using mortgage payments, as an example, you can see how cash flow works. For the majority of us, it is usually an event that is one sided; the money flows out, not in. A borrower obtains a loan from an institution or private party and that entity continually receives the periodic cash flow. All business and financially active people deal with the effects of cash flow.
Cash flow by definition deals with the timing of money coming in (income) in relation to the flow of money going out (expenses). We could think of a number examples that fit the above definition . . . real estate notes, medical receivables, commercial leases, retail installment arrangements, any type of vendor carryback paper and even lottery winnings. These are such a few examples of cash flow.
Owners of assets in the form of money owed them at a future date can sell that right to receive the money for immediate cash. Often the owners of this cash flow do not receive enough money on the periodic basis to fulfill their needs or desires. Once that determination is made, they will look to an entity offering a lump sum cash payment. By selling their rights to the cash flow, an individual could put future income to work right now. They can sell this right to what is called a funding source.
This transaction could be a prime example of the "Time is Money" principle. Should a manufacturer receiving a payment in three or four months or an investor in a real estate note receiving monthly payments sell the future payment or stream of income at a discount for an immediate lump sum payment? Is this a good deal? What can each do with the upfront money? Can that manufacturer use the immediate payment to pay off some bills and reduce his interest expenses? Can he produce more goods with the new cash, sell those goods and turn additional profit? Can he get a discount on new raw material since he now has cash to pay?
Can the real estate investor use the lump sum payment to generate greater returns (investment yield) by lending his lump sum payment money at a higher rate? Can he split his lump sum payment into two, three or more investments to minimize risk? Can he use the money for short term investments and turn his funds for greater profitability? These questions can be asked of many people who receive income streams. Has not our state lottery changed the structure of payout to accommodate people who want a lump sum?
As mentioned, cash flow is a two way street. For many of us it is the expense line and not the income line that is of uppermost concern. As one receives payments, one has options. For the person making the payments, the options are much more limited. As payers, we should look at our options to minimize debt. We should develop a payoff structure so that our cash flow can reflect us as payees not as payers. Copyright © 1999, jjrmf.com