Thursday, 15 June 2017
The Working Capital Robot.
How do we know where we stand in life financially? Do we navigate by net worth? By cash or by some other measure?
I think we should adopt a new approach. Once we understand the working capital of our life then everything becomes simple. One way or another the benefits are for life.
The problem with measuring our progress through net worth is that it includes items that we cannot spend (such as our home) and it includes inputs that are not of our own doing. If our home rises in value we appear to be doing well but this is may be an illusion.
If we restrict ourselves to the cash in our current account we are also misled. Most of the money there has already been committed to bills so the money is not truly ours. If we use cash as our measure we will always be in the red at the end of the month.
A compromise is working capital- this is money that is available in a deposit account but that is not committed to a specific purpose. This is the money available to invest and is the only truly useful measure.
A- Working capital is the only truly useful measure. It is money we can spend and invest rather than money we have already spent in future commitments.