Do you need a degree to do finance? A degree can help, but it’s not necessary. A degree will provide you with a foundation upon which to execute financial activities. You’ll learn definitions, principles, and formulas. You’ll explore case studies. You will engage in mock bookkeeping scenarios and financial analysis. Everything you do will happen within a controlled learning environment. This is one way to learn finance, but in my experience, it is not the best way.
The best way to learn finance is by doing finance. Get into a position, whether at work, at home, or in a volunteer organization, where you can practice financial management. Not only will you learn the vocabulary, principles, and formulas, you will also learn the why and the why not.
One of my biggest memories of learning an important financial principle through real life experience happened with “cash reserves.” I worked for a large non-profit organization. I was in a top leadership position with one of their districts. As we worked on the budget, there was a number on there called “reserve”
A “reserve” is an amount of cash that must be left over at the end of the year to ensure that the district had enough money to start the next year. In our organization, the reserve was managed by the home office. Whenever our district needed cash, we could ask for it from the home office, and they would give us as much as we needed down to the reserve.
For my family’s personal finances, my mother calls this a “hidden.” The bank may show $1,500, but her written checkbook balance only says $500. She has $1,000 “hidden,” or “reserved.”
Not every budget has a reserve. If you are creating or managing a budget, I highly recommend that you implement one. Decide on an amount that would be beneficial in an emergency. Make sure that when you create your budget or financial plan, that your cash does not dip below that figure.
There are a number of reasons to have a cash reserve. One reason is because you could have slow months in your fiscal calendar. For the non-profit, the end of our fiscal year was June 30th. Our slowest revenue months were July and August. Those two months were also two of the heaviest for expenses. The reserve was necessary to sustain us until dues began being collected in September.
The personal hidden was important because some of us will forget that we authorized an expense. It also provides us with emergency cash.
Reserves are also important in times of financial emergency. The corporation I work with full-time shared with us that they had enough cash in the bank to sustain the company at full company for X amount of time. During that time, they applied for payroll grants through the CARES Act, but there were a few more pieces of red tape for them to cut through than other companies had to deal with. Without the secured funds, employees were laid off, and working hours were adjusted. The grant money finally came through, and jobs are secure through the fall. The cash reserve helped this company make it through some of the most challenging weeks of the crisis.
The point of this writing is that if you don’t have a cash reserve as part of your financial plan right now, create it. It’s not a line on the balance sheet. It’s not an expense. It is simply a formally identified threshold stating the minimum amount of cash on hand.
Cash is king, or as one of my students put it, cash flow is king. However, cash could lose it’s royal status if it is not protected with a reserve. If you haven’t created one already, either set one up now, or ensure that one is created in your plans for the next fiscal year.