Home' Trinidad and Tobago Guardian : April 13th 2017 Contents APRIL 13 • 2017 guardian.co.tt BUSINESS GUARDIAN
FINANCIAL ROAD MAP | BG15
Dilemma of cash
aul is a single 39-
year old insurance
adviser with one of
the top three compa-
nies. Even though he
has worked hard over
the past four years at establishing
his business, Paul disclosed that his
monthly income is never predictable
and he could have dramatic swings
from months of exceptional sales to
three months of no income. His an-
nual sales, however, have been stead-
ily increasing and, as at the close
of business last year, he generated
$228,000 in commissions after taxes.
A fundamental part of Paul’s sell-
ing toolkit is a reliable and decent
looking vehicle. His current car is
over 15 years old and has seen bet-
He recently had a breakdown,
which cost him a fairly large sale.
He has since decided to bite the
bullet and trade up. He has his eye
on a new car costing $189,000. Old
faithful could probably fetch about
$20,000 in the open market so Paul
plans to dispose of it and pump the
proceeds into the new purchase along
with his savings of $102,000.
A rough check of his monthly ex-
penses reveals the following fixed
obligations: rent: $3,500, utilities:
$600, gas: $800, insurances: $650,
food: $1,500, entertainment $1,200
and $2,250 in business and other ex-
penses. Every year he visits his god-
mother in the UK at a cost of about
The bank approved a loan of up to
90 per cent of the showroom price
of the new car.
He will be responsible for the in-
surance, legal fees and bank charg-
es amounting to approximately
$13,000. To maintain the warranty
he would have to take the car in for
service every three months at an av-
erage cost of $1,800.
In light of his earnings pattern and
projected expenses, Paul is cautious
about taking on too much debt and
prefers to sink most of his money into
the purchase. He plans to borrow as
little as possible and pay it back as
soon as he can.
Paul is a salesperson and the reality
is: if he doesn’t sell he doesn’t eat.
This is no different from any other
business where overheads are certain
and income variable.
Oftentimes it is a balancing act
when one does not know when and
from where the next paycheck is
coming. However, the longer Paul
stays in the business, the clearer his
picture of the market will be and the
more definitive his projections.
Until that time it is quite under-
standable that he has such an aver-
sion to debt its impact on his monthly
The secret to Paul’s dilemma is
to build enough liquidity into his
finances to enable him to overcome
the dry spells without too much dis-
Some businesses achieve this by
using overdraft facilities, which allow
them to pay their bills and hold out
until the sales come in. This form
of credit has no fixed repayment
arrangements except the monthly
An alternative to using the bank’s
money is simply using business’ own
funds to provide working capital. In
Paul’s case the more cash he has on
hand the more comfort he would feel.
The challenge is: this is the same
capital that he intends to put to-
wards the purchase of the new car.
The more cash on hand the less goes
towards the purchase conversely the
more cash for the purchase means
less cash in hand.
The million-dollar question is:
how much cash should he keep and
how much should he pay down?
Financing and working
The first step would be to calculate
Paul’s monthly expenses with and
without the loan payments. The loan
installments will vary according to
the quantum of his down payment.
When we run these scenarios we will
try to strike a balance between Paul’s
desire for little debt and his need for
cash in hand.
In our calculation of his monthly
expenses we need to bring all of his
quarterly (car service) and annual
(vacation) expenses into monthly
Before the new car purchase, his
bills were a comfortable $12,000
when compared to last year’s av-
erage monthly income of $19,000
Table 1 presents the details of the
various financing scenarios and their
impact not only on his monthly ex-
penses (overheads) but also on his
ability to cover these bills whilst
waiting for his next paycheck.
If Paul chooses to hold on to “old-
not-so-faithful” he would have re-
serves to cover his expenses for 8.5
months. It is hardly likely that he
would bring in zero sales during that
time as such he may be holding on to
more cash than he needs to.
If he “goes for broke” as planned
and pumps all of his cash resourc-
es into the purchase, his payments
would be $1,584 but he will more
than likely run the risk of missing
payments and running into arrears.
If he takes the bank’s offer and
puts out 10 per cent plus charges it
would deplete his resources by only
$31,900 and leave him with $90,100
in remaining cash to pay his bills for
5.5 months. The monthly payment
would now be $3,368 and overheads
jump to $16,468.
In the final scenario Paul could try
to keep his debt at a manageable level
whilst simultaneously maintaining
adequate working capital reserves. If
he pays down 30 per cent he would
use in total $70,600 of cash but re-
tain $51,400 to fund expenses for just
over three months.
Nicholas Dean (CertFa) is a certified
independent financial adviser
and is the managing director of
The Financial Coaching Centre
Ltd. If you have any questions or
need advice on today’s subject
please email: nickadvice@gmail.
com or visit website: www.
The secret to Paul’s dilemma is to build enough liquidity into his finances to
enable him to overcome the dry spells without too much discomfort.
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