Mapgirl’s Fiscal Challenge

I’ll never forget when I learned why companies operated at a loss. I was in a microeconomic theory class when we were drawing graphs on operating costs and profitability. There came a point (on a curve, naturally) where your operating costs were as low as they were going to get, but you were still not profitable. However, the company needed to keep going and manufacturing at an operating loss in hopes that conditions would change. All of the sudden I understood the automotive industry and it’s decline domestically. I understood why it was economically rational to keep on going when a firm was losing money instead of abandon all hope and close up shop.

What is Treasury Management? It’s a practice of handling your operational cash, cash investments, etc, i.e. the stuff that makes up your corporate treasury. It entails managing your cash float, receivables, payables, etc. Read the linked Wikipedia entry. I can’t really say it much better than that. (I’m amazed that people let me get away with these crazy plain English definitions I make up when blogging.)

When it comes to the debate on paying down debt vs building an emergency fund, I think it combines these two concepts. When you have debt, you’re operating at a loss because of interest on your debt. But that doesn’t mean you have to quit and fold, i.e. declare bankruptcy. If you manage your personal treasury, you can operate at a loss for some time without complete collapse.

I must confess that I have a huge fear of being laid off or losing my job in some sudden and catastrophic manner. I work in an industry with a lot of bankruptcies so it’s not like I’m being overly paranoid about this. I really believe that one day I’ll be the victim of a corporate layoff. I’ve been severely underemployed before and I’ve had to drain my 401k plan before I was 30 just to make ends meet. I’ve also watched several friends go through prolonged unemployment after a layoff (measured in years) even though we all live in a hot tech market around the DC Beltway. You just never know. Sometimes you can see the writing on the wall and get out (which I did once and got lucky), but I don’t want to take the risk of being blindsided.

I know that as long as a company has cash, it can keep operating till that cash is gone. That means I can keep paying my credit card minimums, mortgage, living expenses, etc. as long as I have some cash. What bugs me about people who say pay off your debt first is that should a catastrophic employment event occur, being without any emergency fund means late payments and defaulting right away. If you keep a treasury (emergency basket of cash), then at least you can operate at a loss for some time before really scary stuff happens.

I think I’ve repeated myself, but I hope that one of these explanations makes sense to someone who needs the help. My emergency fund is about half of what it really needs to be, but I’d rather have it than not have it. I’ve thought about pillaging my emergency fund to kill off half my consumer debt, but I just can’t do it. I’m not prepared to be unemployed for 12 months, or be underemployed again for the same amount of time.

If I had to do it again, would have drained out my 401k back when I was in my 20’s? Yes, I think so. I was lucky that my plan didn’t penalize me for the early withdrawl, and the cash resource gave me a lot of flexibility to face my bleak future with some optimism. I was able to keep paying my minimums and arrange some major life changes by pillaging my 401k and using the cash. The one thing I would change about my post-college employment is I would have been more disciplined about saving an emergency fund. If I had done that, I might not have had to kill my 401K later on.

I know it’s kind of weird to think of yourself as a corporation. But I’d be an irresponsible company officer at Mapgirl, Inc. if I didn’t take into consideration shareholder value, which happens to be held by Mapgirl, individual shareholder.