Over the long weekend, I’ve been reading Ahead of the Curve by Philip Delves Broughton. Broughton is a journalist who fears that the doomsday for newspapers is fast approaching and decides to switch careers by putting in two years at Harvard Business School for an MBA. The book is an interesting look at business school for non-business types. Since Broughton graduated with a liberal arts degree and spent ten years as a foreign correspondent, his “outsider” perspective is readable for all of us who thought we were taking the high road by studying art, literature, ancient history, philosophy and the like. I could certainly relate when Broughton described his Luddite relationship to Excel. While I don’t plan to rush off to business school, I would like to learn more about finance, accounting, and marketing, both for my own work and to help the husband with his small business.
For me, the most interesting parts of the book are the case studies. Harvard Business School, like most law schools, takes the case study approach to learning. Students prep by reviewing real life situations and face the dreaded “cold call” at the beginning of class to explain the case to the rest of the class. Broughton peppers the book with cases from eBay, Microsoft, small companies, even a medieval farm. I learned the most from one case out of his first-semester finance class. First off, Broughton gives us a layman’s introduction into what the study of finance actually is: “finance is really about one thing: valuation. How do you put a price on an asset? From that basic equation flows everything else.” For the world of finance, the first step is to figure out how much your assets are actually worth.
Through the comparison of one lumber company that keeps too much inventory on hand and must borrow money from the bank each month and Dell computer company, which keeps virtually no inventory and builds all its computers on order, Broughton realizes that one of the best ways to value an company is by how much available cash it has. For most companies, he says, inventory is a big evil. Instead, cash is an asset that is flexible and fluid.
Of course, I quickly made the leap here to personal finance. In my own life, I’ve been all about the inventory. For years, any cash I earned quickly went to books, clothes, and whatever else caught my fancy. A savings account was a noble idea but didn’t seem necessary to a young graduate student. Now that I’ve finally paid for all that inventory, I’m realizing that cash really is a more important asset. At the beginning of this process, I promised myself a shopping spree for paying off the credit cards. Now, like a reformed dieter who looses the taste for Twinkies, I’m not quite as excited about that spree. I do still plan to buy a few nice things, but I think I’ll keep most of that money in the bank rather than sinking it into inventory.
Even though the husband and I haven’t sorted through our financial goals yet, I know that money in the bank will never hurt us. I plan to keep living the frugal lifestyle, selling off unwanted “inventory,” and looking for ways to earn more cash. Then, in a few months, we’ll have a nice little pile to start our plans with. How about you? How do you balance between the “inventory” vs. cash equation for your personal finances?