Cash Flow Management: A Framework Of Daily Family Activities Glenn Muske1 and Mary Winter Cash Flow Management: A Framework Of Daily Family

... ProchaskaCue, 1991, 1993) The specific financial management practices of family financial managers are examined in this study From the analysis of that data, various constructs and relationships are... experience was observed ©1999, Association for Financial Counseling and Planning Education by Edin & Lein (1997), Shepard (1982) and Xiao and Olson (1993) Chang, Hanna and Fan (1997) and Hanna and Chen... (199 0a) Family financial management Family Relations, 39, 221-228 Godwin, D D (1990b) Towards a theory of family cash flow management Proceedings of the Association for Financial Counseling and

Cash Flow Management: A Framework Of Daily Family Activities

The purpose of this paper is to develop a framework to explain and describe the daily cash flow management processes of families From data gathered through semi-structured interviews, themes are developed and linked into a daily cash flow management framework The proposed model suggests that families have a process for managing money The process focuses on short-term viability through safety, control, comfort, and routine aspects Cash flow activities are motivated

by the near future, feelings and values, experience, and situational knowledge The framework fills

a gap in existing research about motivating factors underlying the actual money management patterns of families

Key Words: Cash flow management, Family finance, Family resource management, Money

management, Personal financial behavior

1

Glenn Muske, Assistant Professor, Department of Design, Housing and Merchandising, Oklahoma State University, 135 HES, Stillwater, OK

74078 Phone: 405-744-5776 Fax:405-744-5506 E-mail: muske@okstate.edu

2

Mary Winter, Associate Dean of Research and Graduate Education, College of Family and Consumer Sciences, Iowa State University, 126 McKay,

Ames, IA 50014 Phone:515-232-3019 Fax:515-294-6773 E-mail: mwinter@iastate.edu.

Introduction

For years, scientists have been interested in the

family’s financial management procedures and

processes Monroe (1974), describing the work of

Davies (1795), Eden (1797), and later Engel (1857)

and LePlay (1878), saw these authors as forerunners in

studying the expenditure patterns and management

styles of the family (Liston, 1993) The family’s cash

management practices have been of particular interest

(Godwin, 1990a, 1990b) In 1912, Mitchell examined

not only what the family bought but also the buying

process itself He wrote that making money and

spending money are correlated Of the two, he

suggested that spending money was the more

pleasurable task He noted however that “important as

spending is, we have developed less skill in its practice

than in the practice of making money To spend

money is easy, to spend it well is hard” (Liston, 1993)

Today, family resource management professionals as

well as family development theorists, economists and

sociologists continue to examine not only where the

family spends their money, but also how they spend it

or the methods or system used

Even though family money management has been the

focus of much study, many researchers still question

the level of understanding of the family cash flow

management process (Beutler & Mason, 1987;

Godwin, 1990a, 1990b; Lown, 1986; Varcoe, 1990;

Winter, 1986a, 1986b) The inputs of the process have

been studied, as well as the outputs, but questions still

arise about what occurs within the decision process and

the motivations behind the family’s cash management

decisions

The purpose of this study is to develop a framework to explain and describe the family’s cash management practices The work develops further the data in Muske and Winter (1998) that described the cash management process of family financial managers The framework, developed from a family unit perspective, supplements existing theoretical work by offering additional explanation and description of the cash management process (Sprey, 1995)

Theory and Research on Family Cash Flow

Management

The role of theory in science has been to describe, explain, and predict (Adams & Steinmetz, 1993; Ambert, Adler, Adler & Detzner, 1995) The development of theoretical frameworks aids the understanding of the phenomena occurring in the surrounding world Theory, according to Thomas (1992) and Sprey (1995), is what “makes sense out of facts” (Thomas, 1992, p 4) He goes on to explain that

“theory filters out certain facts and gives a particular pattern to those it lets in.”

Family resource management professionals, focusing

on the study of the financial management processes occurring within the family, have used a variety of theories to explain how the family is managing their financial affairs Initial scientific work on family financial decisions used the predominant paradigm at the time, microeconomic theory Over time, family resource management professionals have continued to use economic theory, but have also included other theories

Cash Flow Management

In the mid-1970s, family resource management

professionals studying the family unit began using

paradigms evolving from other social science

disciplines, including psychology and sociology

(Doherty, Boss, LaRossa, Schumm & Steinmetz, 1993;

Key and Firebaugh, 1989) Today the prevalent

paradigm is systems theory Using systems theory,

hypotheses have been developed and tested with

quantitative methods (Godwin, 1990a) Most studies

have used net worth as the predicted outcome (Beutler

& Mason, 1987; Godwin, 1990a; Godwin & Carroll,

1985; Hira, 1987; Sumarwan & Hira, 1992; Titus,

Fanslow & Hira, 1989)

Financial management professionals have integrated

systems theory with a set of recommended financial

management practices, the “normative practices,” to

assess whether families are managing their financial

affairs properly (Rettig & Mortenson, 1986) The

recommended practices have been in place for the

family’s use since the late 1920s and early 1930s In

parallel comparisons between business and family,

scientists since the 1920’s have concluded that good

business practices translate into good home financial

management practices (Andrews, 1935)

Family financial management professionals, using the

recommended practices and systems theory for

explanation and discovery, have expressed an

uneasiness though with the existing outcomes (Beutler

& Mason, 1987; Godwin, 1990a; Key & Firebaugh;

1989; Varcoe, 1990; Winter,1986b) They are

frustrated by a lack of understanding about the exact

management practices occurring within the family as a

microeconomic unit Studies have found few families

using the recommended practices (Beutler & Mason,

1987; Davis, 1992; Davis and Carr, 1992; Davis &

Weber, 1990; Godwin, 1990b; Godwin & Carroll,

1985; Hira, 1987; Titus, Fanslow & Hira, 1989), yet

little work has been done to discover the methods they

are using instead (Godwin, 1990a, 1990b; Heck,

Winter & Stafford,1992; Prochaska-Cue, 1991, 1993;

Winter, 1986a, 1986b) Godwin (1990a) stated

“much of the literature on family financial

management is prescriptive, including extensive

discussions of what families should do in

managing their financial resources little

empirical research has focused on what families

actually do” (p 222)

Davis and Carr (1992) and Godwin (1990a, 1990b)

stated “the incentives that actually lead people to

embrace (or reject) the process…remain unclear”

(Davis & Carr, 1992, p 14) Thompson, Sharpe, and

Hamilton (1998) is an example of research that is attempting to fill this gap of how planning is actually being done They have studied the retirement planning process of single, midlife women

Studies on the recommended practices have questioned whether a lack of knowledge about the practices or the benefits of using the recommended practices may be a contributing factor (Davis & Carr, 1992: Lown, 1986) Winter (1986a) hypothesized that decisions about the use of specific practices are made on a cost/benefit analysis and that, if families do not feel that the benefits and the practices outweigh the time, costs and effort involved, they will reject the use of the practice Davis and Weber (1990) suggested that the regularity

of income and expenses made the practices seem unnecessary Another possible reason is the maintenance of the status quo, or the tendency to leave things alone if the outcomes are acceptable The saying, “if it ain’t broke, don’t fix it,” comes to mind (Atchley, 1989; Godwin, 1990a, 1990b) Although the recommended practices are considered prescriptive, several authors have questioned whether, indeed, they are the only way that management can occur (Davis & Carr, 1992; Godwin, 1990a, 1990b; Heck, Winter & Stafford, 1992; Muske & Winter, 1998; Prochaska-Cue, 1991, 1993)

The specific financial management practices of family financial managers are examined in this study From the analysis of that data, various constructs and relationships are defined The results are a framework that describes and explains the family’s short-term cash flow management process The study responds to Key and Firebaugh’s (1989) challenge to understand and

“conceptualize the phenomenon,” that being the family’s cash management system Such an understanding allows a more complete picture of the decision making process and, in turn, expands the theoretical base

Methods

The Advantages of Qualitative Methods

This study used a qualitative method to develop a cash management framework Fayol (1929) suggested that

to study what a manager does one must ask the manager as well as watch and follow the manager, in summary, an inductive process Inductive methods allow the researcher to learn about how and why people behave as they do The goal is to understand the individual’s behavior rather than provide a group average (Sprey, 1995)

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Qualitative research lets the voice of the individual be

heard Cunniff (1998), writing about Americans’ low

savings habits, said that to understand why people do

not save, “why not ask the people who aren’t doing the

savings?” (p E3) Writers have noted that statistics

often drown out the voice and experience of the

respondent (Edin & Lein, 1997; Rubin, 1976)

Rosenblatt and Fischer (1993) maintain that qualitative

research provides “answers about meanings,

understandings, perceptions and other subjects in and

about the family” (p 172) They continue:

qualitative family research will always be at the

leading edge because people’s verbal accounts

of their own life…speak best to many research

questions and to most consumers of social

science research (p 175)

The qualitative process began with data collection

Data included observations, words and activities of the

respondents Respondent selection can be performed

in a variety of ways At times respondents are chosen

based on new information they may provide and at

other times selection is done based on extreme

positions For this study, the intent was to develop a

loosely defined homogeneous group Families were

selected from couples known to the researcher, his

spouse, or the faculty members with whom he worked

Similar families were selected and interviewed until

their answers became redundant

Families selected resembled the median or “typical”

American family (Ambert, Adler, Adler & Detzner;

1995; Lincoln & Guba, 1985; Miles & Huberman,

1994) The working definition of this American family

was based on the 1990 census bureau definition of the

median family (1994 Statistical Abstract, Table 714;

1990 Census of the Population and Housing-Social,

Economic, and Housing Characteristics, Table 5; 1990

Census of Population-Social and Economic

Characteristics, Table 16, 17, 23) All respondent

couples consisted of individuals in their first marriage

The ages of the couples ranged from age 30 to age 41

at the end of the three-year time frame during which

the data were gathered All the couples had been

married for a minimum of 8 years Each couple had

one to three children Both adult individuals held a

part time or full time job and their combined income

levels ranged from $40,000 to $60,000 All individuals

held high school diplomas, with the highest degree of

any adult being a bachelor’s degree All of the

respondent couples were white

During the collection of the data and throughout the analysis, themes in the data were noted (Strauss & Corbin, 1990) Themes are the building blocks for theory development (Glaser & Strauss, 1967) As Lofland (1974) wrote, a generic theme emerges “when the structure or process explicated is chosen and brought to a level of abstraction that makes it generally applicable rather than applicable only in a given institutional realm” (p 103) Themes in turn are grouped into constructs, or broad descriptors that, when linked by relationships, form an identified framework (Glaser & Strauss, 1967; Miles & Huberman, 1994; Thomas, 1992) Relationships between the constructs are outlined As relationships link the constructs, grounded theory developed, so called because it is

“grounded” in empirical work

The framework developed is based on case studies of 7 families reported in Muske and Winter (1998) The framework offers an in-depth look at cash management practices including information regarding the reasoning

in the decision making process The case study approach as a research method allows the researcher to learn about people in the context of their lives, in their natural surroundings, performing their normal routines, surrounded by the social structures and individuals with whom they normally come in contact (Bogdan & Biklen, 1992; Lincoln & Guba, 1985; Miles & Huberman, 1994)

In a quantitative paradigm, 7 families would seem to be

a rather small number for research In qualitative studies however, a large sample size is considered unnecessary Ambert, Adler, Adler, and Detzner (1995) and Yin (1989) suggest that an in-depth study of

a small number of cases begins to allow explanation of

“cause and effect” relationships Similarly Sprey (1995) commented that, if the purpose is to generalize

to theory, the sample should be rather small Some qualitative researchers suggest that one in-depth case study can form the underpinnings of a theory (Glaser & Strauss, 1967; Lincoln & Guba, 1985; Rosenblatt & Fischer, 1993)

Using interviews with the self-designated family financial manager, data were collected for up to three years (one family was surveyed for three years, three families for two years, and the remaining three families for one year) Interviews were conducted in the respondent’s home In addition to interviews, an examination of the physical financial management tools was conducted For each family, random expenditures were selected and the money manager

Cash Flow Management

was asked, based on recall information, to provide

information about the purpose of the purchase Finally

the money manager was observed in his or her bill

paying process

All money managers participated in at least three

personal interviews (the maximum number of

interviews for any one respondent was seven) All

personal interviews were tape recorded and then

transcribed The total interview length with a

respondent ranged from five to 12 hours Each

respondent was contacted after he or she had received

copies of the transcribed materials and asked to

comment on the material’s accuracy, intended meaning

and general clarity This process, termed member

checking, is considered extremely important in the

process of establishing study credibility (Lincoln &

Guba, 1985)

In addition, other tools were used to develop accuracy,

reliability and credibility These tools included peer

debriefing; redundancy of data gathering; triangulation

(reaching the same conclusion using various data

types); meetings with a colleague on a periodic basis to

discuss findings; presentation of early drafts to family

financial management professionals for their response

and feedback; and finally, meeting with faculty

members in the design and development of the study

In addition, a colleague read parts of the transcripts to

see if she noted similar reflections, key words and

themes (Bogdan & Biklen, 1992)

After all interviews were completed, a formal analysis

of the data began with the coding of the data Codes

were designed to categorize data into common areas

These areas included the context in which the data

occur, the settings in which the data were discussed,

the processes used, and the perceptions of the

respondents

Framework Themes

The elements of the theoretical framework arose from

the themes Themes represent grouped data pertaining

to similar phenomenon (Strauss & Corbin, 1990)

Themes capture the flavor of what is taking place

within a family and put it at a broader conceptual level

Themes “deepen understanding and explanation”

(Miles & Huberman, 1994, p 173) The following

basic themes are found in the data (Muske, 1996)

Process Each family manager has a process or a

regular method to handle cash flow management The

process is systematic and formalized, done in a regular manner and on a regular basis The process is designed

to keep the family in a stable financial position and not

“go in the hole.” Each individual’s process is unique but the underlying cash management philosophies of the 7 managers are similar to one another and different from the recommended practices The common philosophy is short-term with strategies developed to keep the family’s bills paid

Viability Family managers desire to maintain an

economically viable unit Economic viability means staying current on bill payments, avoiding bills that are not paid Financial success under this system is to “pay all the bills and have no new ones coming in.”

Two primary elements are seen in all systems to help achieve viability First, to help maintain control, the managers look for ways to create an even flow of income and expenses This stability is noted in routines and systems that require little planning and little time commitment The respondents also note stability in the regularity of the monthly bills and paychecks Other strategies used are calendering, income/expense flow charts, false balances, and holding written checks

Even though stability is the preferred mode, family financial managers acknowledge that the financial situation of the family is not static and thus they prepare for changes in cash flow needs (Muske & Winter, 1998) Respondents describe this as “coping.” Coping is identifying strategies that could be used to meet changes in cash flow needs Coping strategies used include monthly payments, using a charge card, using a home equity loan, or having savings available

By identifying strategies prior to a change in circumstances, such changes are handled without the manager experiencing significant distress

Safety Safety is an important theme Safety is

translated as being able to cover current bills as well as offering some means of protection if funding gets tight Safety also is a factor in investment decisions

Control Control arises as a theme when managers talk

about “avoid[ing] an overdraft” or smoothing out cash flow Control is not verbalized; rather it is shown in the activities of the respondents Those activities include false balances (when the account reaches a zero balance, a cushion of money still remains), multiple accounts, and “mad money” or a cookie jar approach Mad money is similar to the envelope method

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recommended today and Rainwater, Coleman and

Handel’s (1959) “tin can” economy, in which cash is

put in a specific place for a specific purpose When

that money is gone, no more is spent for that purpose

until the tin can is replenished

Comfort Comfort is a third cash flow objective

Comfort means having a “cushion” of cash A

“comfort zone” describes an acceptable range of

operations, instead of living by hard, fixed rules

Family savings are part of the cushion (Xiao & Noring,

1994)

Values The respondents verified Deacon and

Firebaugh’s (1988) idea that internal thoughts often

direct their actions Some values are clear such as

“stay[ing] home with the kids” and “family time.”

Another value statement, being “conservative,” is less

definitive but still important in the financial

management process Debt provides a number of

stated values including its acceptance (debt for “toys”

is a perfectly logical thing), its continuity (“I think

most people have [a credit card] that is never paid

off,”) and its prevalence in today’s family (“We live

‘life to the max’ We are going to have it right now”)

Such statements are supported by Porter and Garman’s

(1993) discussion of peer reference groups

Feeling normal Although values are “the essential

meanings relating to what is desirable or has worth,

providing fundamental criteria for goals, thereby giving

continuity to all decisions and actions” (Deacon &

Firebaugh, 1988, p 40), feelings are more contextual,

more like relative values Feelings are defined as

“thoughts or beliefs, often for unanalyzed or emotional

reasons” (Neufeldt, 1994) The most prevalent feeling

is feeling normal, feeling like everyone else

Respondents note this in the debt they carry, the

financial decisions they make and in general nonuse of

the recommended practices

Positive comparisons Similar to but different is the

respondents’ need to feel they are doing as well as their

peers but also better than the situation they remember

as children One of the respondents provided a good

example of this While unemployed, he bought a

computer, car, and pickup, all on credit His purchases

would seem improper if considered alone Only when

his underlying motivators – vacations for his children,

college, giving his family more than he had as a child,

and not allowing debt to exceed his savings – are

considered, does seemingly irrational behavior begin to

seem reasonable in the short run When laid off, he

received severance pay and had access to his retirement funds By converting these to cash, he now had a significant amount of savings that could cover his debt

if needed Therefore he was in a position to give his family what he never had Similarly when respondents note they are “doing okay,” “lucky,” “life is good” or

“losing ground,” the comparison is always given in relation to some other person or group

Ease and convenience As the money managers

discussed the development and use of a financial management system, the concept of ease and convenience often surfaced Money managers look for banks that are physically close or provide quick service The managers want monthly billings and automatic withdrawals Ease and convenience limit the extensive use of mental processing in the financial management system Ease and convenience override a manager’s search for the “best deal.”

Flexibility Managers attempt to develop a system that

is routine, minimizes time and mental requirements, and is easy overall Managers also desire a system that allows some degree of flexibility All seven of the money managers recognize that financial needs are not static and that they need to be able to respond to emergencies, both large and small

Reported time orientation Time orientation

not only is an underlying assumption but also stands out as an important motivator The time orientation for cash flow management of all the families is short If any long-term goals are mentioned, they are general in nature with few specific action steps in place to reach the goal.

Experience The use of experience is noted

over and over in planning for payments and the amount

of money set aside for groceries and other miscellaneous bills Managers also admit that a response to a new situation is often based upon past experience with a similar situation

Information One interesting theme is the

respondents’ search for and use of financial management information The typical sources are not educational classes, formal or nonformal, or work but

“coworkers,” “friends,” “our banker and insurance representative,” “a father of a friend” and a “friend of father,” “newspapers,” and “magazines” such as

“Glamour, Woman’s Day, McCalls, and Good

Housekeeping.” Other sources include credit card “junk

mail,” bank employees, insurance agents, and profit

Cash Flow Management

sharing plan advisors Information is categorized

according to its source, trusted other or unknown

Information from a trusted other is accepted readily

because of the relationship Like Thompson, et al

(1998), the respondents indicated that information

overload was a problem as were financial professionals

who were not understanding

Specific practices Family money managers display a

range of activities designed to achieve the short-term

goals Many of these activities have already been

mentioned This theme will hold a significant role in

the final framework Activities are the link that ties the

motivators and objectives to the desired outcome

According to Doherty, et al (1993), theorizing is “the

process of systematically formulating and organizing

ideas to understand a particular phenomenon.” The

first step is the development of themes Those themes

are grouped into five major constructs: underlying

motivators, stated objectives, specific practices, desired

outcome, and information The next step is to develop

relationships or generalizations as links between the

constructs (Thomas, 1992) These constructs and

relationships then form the framework outlining the

financial managers short-term cash flow management

process, the what and why of what they are doing The

conceptual framework developed from the data is

displayed in Figure 1

Financial management process The box around the

conceptual framework indicates that, in fact, there is an

overall process or system of financial management for

everyone The various systems are sufficiently similar

in themes and relationships to permit combining them

into the suggested framework Clearly, the data

indicate that management does occur and that it occurs

in systematic ways Families are not “willy-nilly” in

the handling of their finances They have in place a

thoughtful process Notable aspects of the process are:

(1) parts of it are similar or can be compared to the

recommended practices; (2) a relatively high level of

mental management occurs in each system; and (3) the

focus of the system is on short-term objectives

Desired Outcome The idea that a process exists starts

with the manager’s ability to express a desired

outcome In each case, the cash flow management

process has the goal of family financial viability

Viability is defined as the continuation of the family’s

fiscal well-being or “keeping the bills paid,” almost

always expressed in the short-term The key to

achieving and maintaining this viability is the development of a system that provides stability yet allows for flexibility to accommodate change driven by internal wants or environmental shifts Stability means evenness, routine, a system requiring little mental exertion to keep it running Baron and Byrne (1987) noted that mental processing capacity is a limited resource

Yet situations change and family managers responded

by including methods to handle change in the least disruptive manner, again while trying to minimize the use of mental resources (Deacon & Firebaugh, 1988) When an engineer designs a structure, built-in flexibility, not rigidity, is a key Too rigid or too flexible and the structure will collapse Instead, the structure is designed to, within limits, move and shift Yet the system cannot be monitored constantly It must be capable of self-adjustment without constant monitoring Similarly, the cash management system of the family recognizes the need to adapt to changing circumstances Families show flexibility in meeting small problems, such as the need for a new air conditioner, and large issues, such as the loss of a job,

a move across country with the loss of a client base, or

a job shift with a corresponding decrease in pay Viable systems limit mental processing needs

Underlying Motivators If viability is the desired end

state, the next questions are, “How was that state selected and how is it maintained?” The answers to those questions start with understanding the primary motivators expressed by the money managers A motivator is “an inner state that energizes, activates, or moves, and that directs or channels behavior toward goals” (Berelson & Steiner, 1964, p 240) The motivation process involves four interacting and interdependent elements, turning needs into goal-focused drives (Luthans, 1977) The themes included

as motivators are values, time orientation, experience, feeling normal, positive comparison, ease/convenience, and flexibility

Values as motivators are consistent with Deacon and Firebaugh’s (1988) conceptualization of the management process Family values motivated a man

to take an $8000 per year pay cut for the sake of family (Muske & Winter, 1998) Another stated value is the idea of “enjoying it now” versus saving for the future This value is interrelated with that of time orientation Feelings develop in part from the money manager’s short and long-term experience The money manager’s expression of feelings was voiced in words and actions

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The wish to be seen as normal is similar to Festinger’s (1954) social comparison theory

Time orientation is a strong and clear motivator across all families A short time frame orientation has a significant impact throughout the study Time, like feelings, is interrelated with values Families struggle with reconciling the need to feel normal and “live life

to the max,” while limiting debt

Figure 1

Financial Management Process Model

Stated Objectives Objectives are more specific,

concrete desires that arise from the motivators Three

themes form a hierarchy of objectives: safety, control,

and comfort Safety means avoiding overdrafts,

control stems from having activities or accounts

available, such as “mad money,” that can be tapped for

quick cash needs, and comfort is having a “cushion” or

a level of safety

The link between the objectives and the motivators

developed as the respondents discussed their cash

management systems The stated objectives are the

terms used when respondents discussed what

controlled their actions Typically the motivators only

emerged after the respondents were encouraged to go

deeper into the process

Specific Practices The activities undertaken by the

family financial manager are a direct reflection of the

short-term objectives of the manager and the family

Practices are developed to accomplish the outcomes in

light of the underlying motivators and stated

objectives Links between objectives and activities are

visible An objective is usually offered when

discussing an activity and, likewise, the discussion of

an objective elicits the description of an activity The

cash management system (mind games, false balances,

calendars, pads, little piece of paper, movement from

loan to loan, the credit card for unforeseen

emergencies, having available and using home equity

credit lines, etc.) is grounded on the objectives of

safety, control, and/or comfort

Feedback The relationship between viability and the

underlying motivators resembles systems theory concept of feedback (Deacon & Firebaugh, 1988) Building routines and using “experience” implies that people use previous efforts to help them manage today Although the respondents did not discuss their development of routines and experiences in terms of feedback, what is described fits the definition of “that portion of the data that reenters a system as input to affect succeeding output” (Deacon & Firebaugh, 1988,

p 12)

Information The last model construct is information

Although not a primary question during discovery, the comments about sources and use of information are enlightening Information is value-laden according to its source “Trusted source” information requires less time to process, a short cut for the manager, thus preserving precious mental processing resources

Miles and Huberman (1994) suggested that, although two theories will never converge perfectly, partial convergence offers support for the suggested relationships from different researchers with different biases, different respondents, and often in different times The model offered fits both systems theory (Deacon & Firebaugh, 1988; Gross, Crandall & Knoll, 1980; Paolucci, Hall & Axinn, 1977) and ecological theory ( Bronfenbrenner, 1977; Bubolz & Sontag, 1993)

Cash Flow Management

The underlying themes also are supported by other

theories As theory is a social construct, existing as

people create it, the use of other studies strengthens the

hypothesized constructs and relationships Several

studies have examined how past experience is used by

the expert to make easier, quicker, and, perhaps, more

accurate decisions (Hershey, Walsh, Read & Chulef,

1990; Rasmussen & Jensen, 1974)

Newman (1988), Rainwater, et al (1959), Blau and

Duncan (1967), and Edin and Lein (1997) all indicated

that families had systems in place for cash flow

management Edin and Lein (1997), Rubin (1976) and

Newman (1988) found short range planning horizons

Newman (1988) indicated that families wanted the

outside world to see the family as normal and

successful in a material sense even as they struggled

for stability Coping was noted by Danes and Rettig

(1995) Edin and Lein (1997) discussed coping as

developing and maintaining a “patchwork quilt” of

strategies used to survive

Safety, as a theme, has been noted by Hanna, Fan and

Chang (1995) and Huston and Chang (1997) when

commenting on family risk tolerance According to

Newman (1988), Rainwater, et al (1959) and

Ehrenreich (1989), safety is the underlying basis for the

middle class Newman (1988) defined the rewards of

the good life as comfort

Various studies have shown the impact of values Edin

and Lein (1997) noted that how single low-income

mothers valued being seen as “good mothers.”

Rainwater, et al (1959) offered an interesting

comparison on values of saving and spending While

the families claimed to be planning for the future and

had a low opinion of debt, two thirds of the participants

had some debt and that “the desire to pay cash had

fallen victim to a more urgent desire, material

consumption” (p 156)

Edin and Lein (1997) discussed feelings as welfare

mothers bought extra things for their children to feel

normal and avoid feeling “completely hopeless” (p.30)

Blau and Duncan (1967) noted the need to feel

“normal” when stocking a home with goods

Rainwater, et al (1959) commented that respondents

wanted flexibility when shopping and needed to buy

some little unplanned thing, a $1 item, to make the

shopping trip feel complete

The importance of previous experience was observed

by Edin & Lein (1997), Shepard (1982) and Xiao and Olson (1993) Chang, Hanna and Fan (1997) and Hanna and Chen (1997) suggested that experience showed families that they had only a small chance of their household income dropping significantly With such limited risk, the concern with long-term preparations was of little consequence

Summary

The purpose of the study was to model cash flow management practices of 7 family money managers From the similarity in responses, constructs were developed that included underlying motivators, stated objectives, and desired outcome The data suggested relationships that link the elements together

The respondents’ priorities: short-term, everyday, cash flow management processes are the focus of this model Each manager focused on remaining financially viable or solvent in the short-term All the respondents admitted that they made only limited preparation for catastrophes and rarely developed specific long-term goals

This short-term focus does not mean, however, that the long-term is ignored The families all have methods in place for many long-term occurrences All are homeowners, a decision that entails commitment to building home equity; all have health insurance; all have some form of retirement plan in place They also have had experience in getting through difficult financial situations before and so reason they should be able to do so again College education costs and a three-to-six month emergency savings account are typically the financial objectives for which little preparation has been made

Today’s families are often criticized for their constant drive to buy more and save less Yet these families did not spend uncontrollably and did not buy everything they wanted even though their credit limits would permit additional purchases Each family had a debt level, developed over time, that they would not exceed They saw themselves as controlling or managing the situation Control, though, was often just a feeling about when to stop buying, rather than a budgetary predetermined dollar limit

Such actions complement the recommended practices The data support the hypothesis of Winter (1986b) that families are managing, and are doing so in a routine, systematic fashion Some of the routines even take the form of recommended practices

Financial Counseling and Planning, Volume 10(1), 1999

10©1999, Association for Financial Counseling and Planning Education All rights of reproduction in any form reserved

Conclusions and Implications

The three main conclusions for family resource

management professionals are: (1) families have a

system; (2) that system relies heavily on routine and

mental processes; and (3) the system is short-term

Each of these conclusions creates a new challenge for

the profession and for a system of cash flow

management

That families indeed have a system is helpful in any

revision or extension of the recommended practices

The issue is how that system is seen in terms of

meeting the family’s needs and the level of resources

used in the process alone

Because the manager wants to limit resources used in

the process of cash flow management, they look for

ways to develop routines, routines that they can store

as a mental script Even in times of change, managers

examine past experiences or preset practices to

discover the least expensive (in terms of mental

resources, not necessarily family dollars) method to

handle the situation Paper and pencil are used as a last

resort and even then written planning is often done in a

quick burst, relying heavily on a mental picture of the

past

The profession must recognize the focus on short-term

viability that may be endemic, e.g., keeping the bills

paid The family financial managers interviewed in

this study do not focus on paying themselves first

Instead they want to have no bills from others The

savings programs noted are typically automatic, direct

contributions from another account or payroll Such

programs generally are set up to meet a short-term goal

and not a long-term goal They could be easily

accessed to cover current expense shortfall and, in fact,

are accessed, as funds are transferred readily between

accounts There is no attempt to earmark those

accounts for long-term goals

The short-term finding is also supported by previous

family resource management literature (Beutler &

Mason, 1987; Godwin, 1990a, 1990b; Prochaska-Cue,

1991, 1993; Varcoe, 1990; Winter, 1986a, 1986b)

Certainly this short-term mindset of the individuals

offers some explanation for why it is so difficult to

encourage individuals to do long-term planning

As noted, many long-term needs are already covered,

typically required or encouraged by an outside

institution Examples are automobile insurance,

property insurance, and health and life insurance by an employer Even retirement, in the minds of the respondents, is partially covered through Social Security In addition, they have access to additional retirement funds through private plans, six of which are employer-sponsored and into which the employer contributed Although skeptical and cautious about their retirement planning, the respondents see current retirees as generally enjoying their life with adequate finances to meet their needs Left out of the long-term planning needs, though, are preparation for college, the loss of a job, and emergency savings College preparation might be considered a known need while the other two represent an unknown Most of the respondents know they should be taking steps to save for these goals, but are not

Each of these long-term needs could be met with a savings plan Yet the respondents have indicated that it

is difficult to use savings Clearly one way to assure the long-term nature of the accounts is to make them untouchable without severe penalty, like an IRA Without such a deterrent, savings accounts such as those opened for the receipt of 3 to 6 months income as emergency savings become yet another account to be drawn on as needed

One tool might be the development of a new savings vehicle similar to IRAs: untouchable without heavy penalty unless used for their express purpose Already several states are exploring savings plans for college that have such structure Such accounts might also be a method to respond to recession or the loss of a job Automatic withdrawals and payroll savings would increase the use of such accounts

Finally, the way the family resource management professional enters the family cash flow system is important Typically not a trusted other, the professional must establish such a relationship The manager is strongly influenced by the mass media and

an informal network of friends, relatives, and acquaintances with whom information is exchanged on

a regular basis The public media reaches far more people than the more academic sources; subscriptions

to the Journal of Family and Consumer Sciences are 25,000 per quarter versus Good Housekeeping’s 5,000,000 per month or Money’s 2,000,000 per month

(Ulrich, 1994) These numbers represent only a portion of the print media; they do not even touch on the electronic media such as a “Today Show” segment that might reach 10 to 15 million people or the radio or the Internet Financial management professionals must

Cash Flow Management

use these outlets and become the experts for the media

and the source for proactive rather than reactive

information The output of the scholarship process

must include dispensing information in such a manner

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