Next Worry Date Formula
Posted on November 25, 2013 @ 06:29:00 AM by Paul Meagher
Scanning a book by Micheal Janda called "Burn Your Portfolio: Stuff They Don't Teach You in Design School, But Should", 2013, Peachpit Press.
I came across an interesting financial nugget that he calls the "Next Worry Date Formula" that I will share with you today.
Janda manages a successful design firm and came up with the idea of the "Next Worry Date" because alot of money was coming into and out of his business and he had generalized anxiety about the financial situation of his company. To resolve his anxiety, he made some calculations in his head to figure out if he should be worried about money. Eventually, he realized that he should write these calculations down and use them as a basis for figuring out when he needed to start worrying about the cashflow situation in his business. The result is the Next Worry Date formula which looks like this:
Total cash in the bank
+ Total receivables
+ Total remaining billings for current month
- Tax money (money set aside to pay quarterly taxes)
- Emergency fund (money set aside for absolute emergencies)
= Total Cash Flow
/ Monthly overhead cost (divide by monthly costs)
= Number of months of cash flow coverage
- One month
= Next Worry Date (that is one month before money runs out)
To illustrate how the formula is used, Janda uses the example of a freelancer working from home doing the Next Worry Date calculation on August 1st. Here is what the numbers look like:
$12,300 Total cash in bank
+ $6400 Total receivables
+ $5300 Total remaining billings for current month
+ $3500 Total remaining billings for next month
- $3000 Tax money - since it is August 1st, you have two $1500 quarterly payments remaining for the year
= $14,000 Total Cash Flow
/ $6000 Monthly overhead cost - let's say you pay yourself $5000 per month and have 1000 in additional business expenses
= 2.4 months Number of months of cash flow coverage
- 1 month
= 1.4 months Next worry date is one month before money runs out.
= Sept 30th Next Worry Date
One quibble I have with this calculation is that, by my figuring, 1.4 months from August 1 would be approximately the middle of September, not the end of September. This could be an error or it could be intentional. After going over another example calculation below I'll give one possible rationale for assigning a Next Worry Date in this manner.
The next example Janda uses is for a small design agency of 10 people or so (the numbers may be fairly realistic given that Janda manages a design firm). Again using August 1st as the date when the calculation is being performed, he computes the Next Worry Date as follows:
$87,300 Total cash in bank
+ $109,000 Total receivables
+ $72,500 Total remaining billings for current month
+ $58,400 Total remaining billings for next month
- $12000 Tax money - since it is August 1st, you have two $6000 quarterly payments remaining for the year
- $45,000 Emergency fund
= $270,200,000 Total Cash Flow
/ $65,000 Monthly overhead cost
= 4.16 months Number of months of cash flow coverage
- 1 month
= 3.16 months Next worry date is one month before money runs out.
= Oct 31th Next Worry Date
So, in this case, 3.16 months from Aug 1st is approximately Oct 31st. Perhaps Janda likes to assign a worry date to the most reasonable end-of-the-month timeslot when he thinks he should start to worry again about his finances. It is often the case that financial tracking is done on a month-by-month basis so putting a worry date in the middle of the month can make it trickier to figure out where you stand financially, so perhaps it makes sense to do the calculation at the beginning of each month and assign next worry dates to an end-of-the-month slot that seems most reasonable. What we are monitoring with the next worry date is whether you do in fact end up cashless on your next worry date. If you do, then you must react either by cutting costs or taking on new projects or both. You then need to start monitoring your financial situation on a more constant basis to know exactly where you are. Eventually, you want to move the next worry date back out into the future far enough that you don't have to keep monitoring it as much.
Most entrepreneur's don't have a steady pay cheque so it is easy to develop anxiety over finances. Generally the way to overcome that anxiety is to sit down and figure out your finances to determine where you actually stand. I offer up the Janda's Next Worry Date formula as one framework you might use to make your calculations and manage anxiety about finances. One aspect of this calculation that I find particularly interesting is that you won't find this formula or calculation in textbooks on finance or accounting perhaps because they are written for people who often end up doing the books, or advising for, a large company. The concept of a "next worry date" is not as real to them as it is to an entrepreneur with an uncertain cashflow. The concept of a worry date is not something they teach you in business school, but it becomes very real when you enter the working world as an entrepreneur. As an entrepreneur you need to manage your money effectively but also not obsess about it. The Next Worry Date formula is one tool you might use to help think about your finances more realistically, with the proper amount of anxiety, and at the appropriate times of the month.
The Resilient Economy
Posted on November 19, 2013 @ 06:56:00 PM by Paul Meagher
Making my way through Ben Falk's permaculture book, The Resilient Farm and Homestead (2013). In today's blog I want to reflect a bit on the concept of resilience and how important it might be going forward.
Merriam Webster defines Resilience as:
The ability to become strong, healthy, or successful again after something bad happens.
A resilient farm, then, is one which is prepared in the event that one or more doom-and-gloom scenarios come to pass, specifically, that climate change makes the planet less inhabitable, that peak oil makes it more difficult to obtain fossil fuels, or that a financial meltdown grinds the economy to a halt. A resilient farm is one designed in such a way as to be prepared if one or more of these scenarios come to pass.
In practice this would mean things like having gravity-based access to water, becoming less dependent upon machinery to manage the land, growing your own food, stockpiling some goods that might become hard to get but essential to making life easier (e.g., chainsaw replacement parts), etc...
Many farms are heading away from resilience, becoming ever more dependent upon fossil fuels, tractors, hybrid seeds that don't produce viable seeds to plant next year, irrigation pumps, and so on. They will not be much use to us when the shit hits the proverbial fan.
It is easy to brush off the need for a resilient economy as so much end-of-the-world blabber, but I think to do so would be to potentially miss a big opportunity. Ben Falk offers landscape design and architecture services, using permaculture as his theoretical basis. He appears to be doing quite well at it. He has a growing business for a service that people desire - to develop a landscape and living arrangements that offer the possibility of becoming more resilient.
The transition movement (http://www.transitionnetwork.org) is becoming
more popular with each passing year with innovation focused on developing a more resilient local economy; one that is better prepared if "something bad happens". The leader of the transition movement, Rob Hopkins, recently published a book, "The Power of Just Doing Stuff" (2013) that documents some of these resilience-oriented innovations.
Whereas Ben is focused upon making farm's more resilient, Rob is more focused on making urban environments more resilient. The transition movement is experimenting with some disruptive social innovations that threaten to radically alter how the economy works, what they call the Reconomy, which could be construed as a shorthand for the "Resilient economy". I look forward to learning more about the transition movement's latest innovations, not just out of academic interest, but because I think innovations directed at making the economy more resilient are harbingers of where the economy needs to be headed and is starting to be headed.
Posted on November 13, 2013 @ 10:30:00 AM by Paul Meagher
I am enrolled in an online permaculture course where the goal is to achieve a permaculture design certificate at the end of 1 year or sooner depending on how much I want to study. An important permaculture idea that I want to focus on today is the idea of "stacking functions". I think this idea is generally useful to know about so will be sharing some of my research.
One of the permaculture books I consulted is Gaia's Garden: A Guide to Home-Scale Permaculture (2009), 2nd Edition, by Toby Hemenway.
Hemenway introduces the concept of "stacking functions" by way of a home gardening example:
...every part of the garden does more than just one thing. Permaculture designers have a bit of a jargon to describe this. They call it "stacking functions". Nothing in nature has only one function; it is furiously efficient in this way. A shrub, for example, doesn't just cast shade. It feeds winter-staved birds with its berries, offers shelter, mulches the soil with its leaves, provides browse for hungry deer and porcupines, blocks the wind, holds the soil with its roots, collects and channels rainwater, and on and on.
Nature always stacks functions, because that shrub, or any living thing, represents a big investment in matter and energy, two things that nature husbands with immense stinginess. Nature is supremely skilled at getting the most bang for the buck, squeezing every erg of energy out of that shrub, tying it into lots of other cycles to maximize the return... By making plants perform multiple functions, nature users her energy investment very efficiently. (p. 33)
.... The two aspects of function stacking - each element performs multiple functions, and each function is served by multiple elements - can be used throughout the garden, on many levels, to align the landscape with nature's might. (p. 35)
Ben Falk, in his permaculture book, The Resilient Farm and Homestead (2013), uses a nice down-home wood cookstove example to convey the idea of "stacking functions":
Ben has this to say about how his wood cookstove stacks functions:
The homestead's most important power plant is our wood cookstove. It is pictured here in typical midwinter action performing multiple functions simultaneously: boiling tea water; cooking a multiday meal of venison, lamb, squash, potato, seaweed, shiitake, sunflower seed, kales, and garlic; boiling gone-by squash for the ducks; baking cookies; simmering chage-reishi chai for desert; heating all the hot water needed by two people for bathing and dishes; and heating fifteen-hundred square feet of space to 72F on a 20F day. (p. 220)
Gloves appear in the drying rack so I would add "drying out clothes" to the list of functions that Ben's wood cookstove provides. Ben's stove is not just functionally stacked, it is literally stacked with objects that carry out the different functions through their relationship with his "power plant".
These are good examples to use to grasp the concept of "stacking functions", however, it is interesting to note that Bill Mollison, in the primary text for the field of permaculture, Permaculture: A Designer's Manual (1988), does not appear to use the jargon of
"stacking functions" explicitly in "Chapter 3: Methods of Design" where much of his discussion on the importance of functional design first takes place (it is also not listed in the book's index as such). Perhaps the "stacking" metaphor puts too much focus on the object attributes rather than the relationship between object attributes. This is what Bill has to say at the beginning of chapter 3:
Any design is composed of concepts, materials, techniques, and strategies, as our bodies are composed of brain, bone, blood, muscles, and organs, and when completed functions as a whole assembly, with a unified purpose. As in the body, the parts function in relation to each other. Permaculture, as a design system, attempts to integrate fabricated, natural, spatial, temporal, social, and ethical parts (components) to achieve a whole. To do so, it concentrates not on the components themselves, but on the relationship between them and on how they function to assist each other. For example, we can arrange any set of parts and design a system which may be self-destructive or which needs energy support. But by using the same parts in a different way, we can equally well create an harmonious system which nourishes life. It is in the arrangement of parts that design has its being and function, and it is the adoption of a purpose which decides the direction of the design.
Definition of Permaculture Design
Permaculture design is a system of assembling conceptual, material, and strategic components in a pattern which functions to benefit life in all its forms. It seeks to provide a sustainable and secure place for living things on this earth.
Functional design sets out to achieve specific ends, and the prime directive for function is:
Every component of a design should function in many ways. Every essential function should be supported by many components. (p. 36)
I'll end my permaculture study today with this. Hope you find this discussion of stacking functions useful in thinking about what good design might consist of.