Managing Your Flowie
A look at delaying payments...

by Al Levit

Glendale, CA (Aug. 14, 1998) -- Yesterday, I started dealing with managing your moola by writing about debt: the good, the bad, and the down-right ugly. Today, I'll conclude my week of Cash-King columns by explaining how I apply our Cash-King Flow Ratio for investing to my personal finances.

First, let's walk through a brief review of the Foolish Flow Ratio, which is more fully explained in Step 7. For a Cash-King Company, we determine the Ratio by this division: (Current Assets - Cash) / Current Liabilities. We want to get the Flowie as low as possible, with a number less than 1.25 being solid and a Flowie of less than 1.0 being outstanding. The reason we like the Flow Ratio so much in Cash-King land is that it gives us a good idea of how well the company is managing its inventory and cash.

Companies with unmanageably high Flow Ratios are eventually punished by the market (cf. a company like Nine West this year), since they have to tie up cash unproductively in inventories and accounts receivable. That ain't pretty. On the other hand, companies that are able to use other people's money, through the interest-free "loans" recorded in current liabilities, are rewarded with low Flow Ratios (these "loans" include accounts payable, accrued compensation, and deferred income taxes).

That's all well and good, but how does that relate to your personal finances and mine? Well, almost all of us have cash, but it's a little more difficult to determine what are our current assets and current liabilities. The Motley Fool Investment Workbook did a stand-up job of this. Let's build on that.

I think we can manage our own Personal Flow Ratios (PFR) and our general standing by:

1. Moving long-term savings to marketable securities.
2. Delaying payments until they are due.
3. Using our credit cards Foolishly.

Let me make it clear that in this column, we're just dealing with cash and the current liabilities... payments that have to be made. With that, let's press ahead.

Managing Our Cash

This corresponds to the "current assets" part of the Flow Ratio, but doesn't relate directly to Flowie. That asset, cash, is something that we really want to keep to a minimum over the long haul. Why? Because we'll earn very little or no return on long-term savings that aren't invested in stocks.

In fact, we'll often be returning a NEGATIVE return on that cash, because these days, banks hit many checking accounts with fees. Those that don't have direct monthly fees usually pay little or no interest, and they require a stiff minimum balance to boot. When you figure the cost of the lost interest on the minimum balance, and the baseline fees, and the onward progress of inflation, you'll usually find these aren't a safe place at all to have your long-term savings.

If you follow the philosophy of moving your hard-core (five years or longer) savings into the stock market, you'll definitely still want some kind of short-term investment account. These are the funds that you don't necessarily need this week, but you may well need within the next five years. For most people, a money-market account works best for this purpose. But shop around and ask questions in our forum. It pays to ask questions, Fool.

All of this won't help your Personal Flow Ratio (PFR), but it will put you in a stronger position over the long haul.

Managing Our Payments

This section corresponds to the current liabilities of a Cash-King company. For a good Personal Flow Ratio, we want to keep our cash as long as possible, and give it to our creditors at the latest possible date. This means we pay our bills when they're finally due, but not before. For large payments, like the monthly mortgage payment, consistently paying within a day or two from the final due date can save more than a hundred of dollars of interest each year. In fact, many mortgages don't charge a penalty if the payment is received within 15 days AFTER the end of the month. The interest savings can be increased 50% by delaying payment until the penalty date with a mortgage like this.

If you want to strut like a CFO, hold these payments off as long as you can.

I do, however, recommend Foolish moderation. Make sure that the payment actually reaches the creditors before any late payment penalty kicks in. In general, one or two late penalties in a year will erase all the interest gains built up from carefully paying bills at the latest allowable payment date. In addition, you may want to think about who your creditors are. I don't have any problem paying the bill to a big institution on the last day I can. But if I'm doing business with a friend, I generally send payment immediately. (Incidentally, we don't think it's a good idea to make less friends in order to generate greater profit!)

Using Credit Cards Foolishly

Last, but not least, let's talk about credit cards. You have them. We have them. And we spend more time writing about credit cards in Fooldom than any major financial services organization in the world. Why? Because the average 19% interest rates on these devices are ludicrously high. THIS is what we think Alan Greenspan should mention in his testimonies -- rather than bothering to make market calls.

Now, typically we have very few nice things to say about credit cards. But used correctly, they can actually be very Foolish. The Foolish rules for credit card use are as follows:

1. Charge as much as you want to. (Particularly if you earn points for doing so.)
2. But only charge as much as you can pay in full each month.
3. Never -- and I mean never ever never -- pay interest.
4. Make a general point of avoiding cards with annual fees. Negotiate them away. And only accept them when they have really great frequent-flier deals.

Many people will find that they really can't play by these rules, because they're pretty strict. You have to be careful to abide them. Because while most credit cards don't hit you with interest if you pay on time, if you're even one day late, kablammo! They sock you with interest. Thus, if you charged $4,000 last month, you'd pay nothing if you paid on time, but $60 interest (18% interest for one month) if you were just one day late. In addition, there may well be late fees on top of the $60 interest!

On the other hand, if you have the discipline to pay off the balance every month, you can wind up with a large amount of free credit on a more or less continual basis. You've got the float working in your favor. That makes for potentially a very nice Personal Flow Ratio (PFR). By managing your mortgage payments and your credit-card payments Foolishly, you can save hundreds, even thousands, of dollars each year. Money which can be locked away into the public markets, compounding away to your great delight.

That's it for me for this week. If you have some time this weekend, check out the Fool's summary of Gap's Q2 conference call.

Fool on,


08/14/98 Close

Stock  Change    Bid 
 AXP   -1 5/16  93.69 
 CHV   +  5/16  80.13 
 CSCO  -  1/4   96.44 
 KO    -1 15/16 76.81 
 GPS   -  9/16  62.94 
 EK    +  7/16  82.50 
 XON   +  3/16  68.38 
 GM    -1 1/4   67.81 
 INTC  +  15/16 86.19 
 MSFT  +  5/16  104.25 
 PFE   -  13/16 101.19 
 TROW  +  5/8   34.63 
                  Day   Month    Year  History 
         C-K      -0.27%  -3.36%  11.69%  11.69% 
         S&P:     -1.13%  -5.17%   6.14%   6.14% 
         NASDAQ:  -0.69%  -4.39%   8.31%   8.31% 
 Cash-King Stocks 
     Rec'd    #  Security     In At       Now    Change 
     2/3/98   24 Microsoft     78.27    104.25    33.19% 
     5/1/98   37 Gap Inc.      51.09     62.94    23.19% 
     2/3/98   22 Pfizer        82.30    101.19    22.95% 
    6/23/98   23 Cisco Syst    86.35     96.44    11.69% 
    2/27/98   27 Coca-Cola     69.11     76.81    11.15% 
     2/6/98   56 T. Rowe Pr    33.67     34.63     2.83% 
    2/13/98   22 Intel         84.67     86.19     1.79% 
    5/26/98   18 American E   104.07     93.69    -9.97% 
 Foolish Four Stocks 
     Rec'd    #  Security     In At     Value    Change 
    3/12/98   20 Eastman Ko    63.15     82.50    30.65% 
    3/12/98   20 Exxon         64.34     68.38     6.28% 
    3/12/98   15 Chevron       83.34     80.13    -3.86% 
    3/12/98   17 General Mo    72.41     67.81    -6.34% 
 Cash-King Stocks 
     Rec'd    #  Security     In At     Value    Change 
     2/3/98   24 Microsoft   1878.45   2502.00   $623.55 
     5/1/98   37 Gap Inc.    1890.33   2328.69   $438.36 
     2/3/98   22 Pfizer      1810.58   2226.13   $415.55 
    6/23/98   23 Cisco Syst  1985.95   2218.06   $232.11 
    2/27/98   27 Coca-Cola   1865.89   2073.94   $208.05 
     2/6/98   56 T. Rowe Pr  1885.70   1939.00    $53.30 
    2/13/98   22 Intel       1862.83   1896.13    $33.30 
    5/26/98   18 American E  1873.20   1686.38  -$186.83 
 Foolish Four Stocks 
     Rec'd    #  Security     In At     Value    Change 
    3/12/98   20 Eastman Ko  1262.95   1650.00   $387.05 
    3/12/98   20 Exxon       1286.70   1367.50    $80.80 
    3/12/98   15 Chevron     1250.14   1201.88   -$48.27 
    3/12/98   17 General Mo  1230.89   1152.81   -$78.08 
                               CASH     $94.76 
                              TOTAL  $22337.26 
 *Please note: On 8/4/98 $2,000 cash was added to the
portfolio for future investment. This will be reflected
in the numbers as soon as possible.

*The year for the S&P and Nasdaq will be as of 02/03/98