The following is an interview with Sandra Simmons, Founder and President of Money Management Solutions Inc. on the state of business money management in the United States.
The current economic crisis should serve as a harsh money management lesson to all of us. Every economy, whether large or small, be it a large corporation or the household income, will always be at risk to the degree that it relies upon credit for its survival. It is not that credit is inherently evil or bad; rather, credit and living beyond one’s means is a tempting financial seductress which will always threaten to wreck our financial ships upon hidden fiscal shoals.
The problem with credit is risk. Whenever you take out a loan, use a line of credit, or even use a credit card, you are taking a financial risk to some degree. That risk is that you will have enough money at a future date and time to pay back that financial obligation in full and in a timely manner. There is nothing particularly wrong with using credit as long as there is virtually no risk involved in paying the money back.
There is a lot wrong with living way beyond one’s means and spending virtually every dime one makes to pay off creditors. This can be risky in the extreme, because with just one slip, the whole house of cards can tumble down very quickly.
“I am not against the use of credit,” says money management expert Sandra Simmons. “What I am against, however, is the overuse of credit to create a lifestyle or a business situation which is basically false. Living in a condition based on credit and debt is very, very risky. Done on a national scale, you can see what has now happened.”
Simmons, who is President of Money Management Solutions, Inc. (www.MoneyMgmtSolutions.com), a business-to-business consulting and money management products and services company, located in the Tampa, Florida area, has been warning for years now that the economy was dangerously overextended. Even at the virtual height of Wall Street, Simmons could see the writing on the wall and the danger that was lurking just beneath the surface of the credit markets.
“An economy on a national scale is really just the sum of its parts,” says Simmons. “I could see that individuals and businesses were over extended and relying too much on credit. Because credit was easy to get, people took advantage of it and were living beyond their ability to pay. When an entire national (or world) economy is built upon such a shaky and risky foundation, it makes it vulnerable.”
Simmons’ approach to wealth and financial success is rather old fashioned: You work for it. She says that the best and safest way to be financially successful is to practice good money management: pay your bills, set aside savings and reserves, and avoid using credit.
“Now I know none of you reading this article fall into this category, BUT I call people who are overly tempted to live beyond their means and use credit “Gratification Groupies”. I say this because they fall victim to the credit trap of having to have it now, and worrying about how to pay for it later,” Simmons says in reference to our instant gratification oriented society. “Instant gratification, however, is not the road to wealth and financial freedom. Oftentimes, it is a path that leads to heartbreak and financial failure.”
What is interesting is that it is not so much how much money is made; it is what you do with it that determines wealth and economic condition.
“I have clients who have made millions who were in dire financial straits, and who, despite all of the money they were making were always behind and never had enough to meet their financial obligations,” says Simmons. “And I’ve also had to fix businesses that had millions in sales, but weren’t profitable. In either case, the real problems had to do with the handling of their cash flow and money management. Solving those problems put them on a firm financial footing.”
Simmons’ money management strategies are fairly straightforward. The difficulty is not in understanding them so much as having the fiscal discipline to implement them.
Some of her principles are as follows:
Money Management Principle 1 – Use CASH Not Credit
“Each time you buy something using lines of credit or credit cards because you don’t have the money to pay for it, you are promising your future income to the credit card company,” says Simmons with emphasis. “Those future earnings will undoubtedly be needed to pay your regular household or business operating expenses. That’s when you end up in the pay-for-life program known as the credit trap.”
The only exception is buying property that increases in value, such as usable business assets, or investing in commercial buildings that put more income in your pocket and more profit on your bottom line. Using your money to make more money is smart money management.
Money Management Principle 2 - Don’t Spend More Than You Earn
The most direct route to financial disaster is spending more than you make. You can keep a good quality of life for your business while reducing optional spending. This can be accomplished by acts such as buying used equipment rather than new, or negotiating better buying margins for your raw resources and supplies. Don’t buy something because you only want it, but don’t really need it. It’s just a plain good money management practice.
Money Management Principle 3 - Money Must Be MADE Before It Gets Spent
“If there is some future large purchase you need to make, begin by setting aside small amounts of cash into cash reserves for that purchase and keep that up until you can pay for it with cash,” Simmons says in reference to the safest way to make larger purchases without using credit or going into debt.
On a company level, if you will need to purchase or upgrade equipment for your office, then figure out what the costs will be and work out how much money you have to set aside every week to have the full amount in the month you will need to make that purchase. Plus look for and negotiate to get the best deal possible.
“I know this takes a lot of discipline,” says Simmons, “but it keeps you out of the credit trap. And I would argue that in the end it is more satisfying because once owned, you don’t have to worry about how you are going to pay for it because it is already paid for. It may not be instant gratification, but it is definitely a sense of accomplishment.”
Money Management Principle 4 - Put Away Some Cash for Emergencies and Future Operating Expenses
“You will sleep much better at night with the financial security of knowing you have money stashed away in reserves for emergencies like unexpected repairs to a vehicle or an office machine, increases in employee benefits expenses, or experiencing a big drop in income,” Simmons says. “When you have a cash cushion you can get your hands on immediately, then magically, you don’t even worry about money, and your focus returns to living life and enjoying it, and earning money suddenly gets easier.”
In reality, the primary thing you have to be afraid of should there be another Great Depression or an economic downturn is not having enough (or any) cash reserves tucked away that you could immediately get your hands on.
Out of every bit of income that comes in the door, immediately set aside 10% and stash it in an interest bearing savings account that you have designated for your cash cushion.
The above steps, done on a national scale, would create an enormously stable foundation on which to build a true economy that is rock solid.
“I want business owners to know that there is something that they can do about their economic circumstances and that they do not have to wait and see what further actions the government is going to take in order to try and fix the economy,” says Simmons in conclusion.
“Whether you’re a large company, small business, or an individual, stop relying on credit, pay off your debts, and start setting aside money and get on the road to economic prosperity. I guarantee that it can be done, and my own clients are not worried about the economy because they have applied sound money management principles in preparation for the kind of economic circumstances we now find ourselves in.”
“Their weekly use of our Money Management Solutions software program to plan how to allocate their cash flow in their own best interests, and their implementation of the points in our Business Profits Checklist, among other strategies has put them on a firm economic footing.”
