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Posted on November 25, 2013 @ 07:29:00 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.
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