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Pay Attention to Long and Short Term Cash Flow

May 2, 2011

Recently the Wall Street Journal wrote about an issue with public pension plans and the discount rate they use to project earnings. The higher the rate, the less money that needs to be deposited in the plans now.

Actuaries want to lower rate to be accurate. Governments want a higher rate so they have to contribute less. FYI, these plans use an old “defined-benefit” model where benefits are guaranteed no matter how the investments perform. If performance is low, future governments will have to contribute more.

I don’t want to discuss public vs. private other than to say that when, as a business owner, it’s your money and you pay attention to both the long and short term needs. Owners don’t have the luxury of passing off the true costs to future regimes.

This is why budgeting and forecasting are so important, not just for profits but for cash flow (which is often very different than profits). I’m working on a three-year budget for my Rotary club and was driven to do this by some one-time costs in each of the next few years. If we don’t do it now, future club leaders will be in a bind.

“Money often costs too much.” Ralph Waldo Emerson

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