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CHAPTER 4 CASH FLOW MANAGEMENT AND CONSUMPTION SMOOTHING The previous chapters provided a description of respondents’ four cash flow streams: the income they earned; their household and business spending; and the money that flowed through the financial tools they used. This chapter analyzes the confluence of these four streams of cash to understand how respondents used financial tools to manage their cash flow. The starting point for the analysis will be the concept of consumption smoothing. Consumption smoothing is the idea that people want to stabilize their spending over time despite temporary changes in their income. In other words, an individual with basic, necessary expenditures each week will try to meet those expenditures each week regardless of unexpected gains and losses in his or her income. However, meeting those expenses can be challenging, especially in weeks when income cannot cover these basic necessities. The consumption smoothing concept suggests that individuals will be able to meet the deficit by “borrowing” against future income by relying on savings or debt. For example, Figure 23 shows the challenge “Elizabeth,” a hypothetical individual, might face. In the first week, she will have a small deficit if she purchases all her household and business necessities. She can make up that deficit in the following week with her increased income and slightly lower business spending, but that surplus is in the future. She must do something during the first week to cover the deficit. Figure 23: The Consumption Smoothing Challenge There are two ways “Elizabeth” can manage this situation. First, she can reduce her spending on household or business necessities, but this has obvious downsides. A reduction in household spending may cause her or her children to go hungry while a reduction in business spending may negatively affect her ability to earn money in the future. The second option is to use financial tools in the first week to cover the shortfall. She could do this by taking money from her savings now and then replenishing it with her surplus from the second week, but she would need savings already to do this. She could attempt to secure a loan but would need to have developed a reputation as a low risk client for MFIs or local moneylenders to offer fair terms. Receiving a cash transfer from a family member or friend is also an option if she has good relationship with those people. However, the cash transfer may come with an implicit agreement that she reciprocate the transfer in the future. Go To Menu 31

Eating Away at Business Capital Martha started her business in week 30 to support her children. She had just been abandoned by her brother and needed money. She turned to her sister and her husband to help finance this business. Her sister sent her ZMW 100 through MTN to help her, while her husband provided her with an in-kind gift of three bags of charcoal, valued at ZMW 175. This gave Martha ZMW 275 in start-up capital that she could use to launch her business. Figure 24: Martha's Cash Flows Martha, however, ran into problems in keeping her business going. The main reason for this was her need to use money meant for business inputs to purchase food for her household. We see that she regularly made large purchases for household expenses that were often larger than her business expenses. While her home savings, cash gifts, and intra-household transfers helped mitigate this discrepancy, they did not fully cover her spending. During the 14-week period that she operated her business, her average weekly inflows were ZMW 121.5, and her average weekly outflows were ZMW 123. This meant that Martha was losing an average of ZMW 1.5 per week. Despite regularly using her home savings and receiving financial support, Martha was unable to use these tools to properly manage her business’ cash flow, and it resulted in her expending all her capital. In the end, she chose to stop her business since she was not able to earn the money she needed to keep it operating and feed her family. In the rest of this chapter we lay out this story in more detail, examining how individuals in the sample used financial tools to manage their cash flow. We use the income segmentation framework from Chapter 2 as a way to understand how different levels of and variation in income create different cash flow management challenges. Once we have analyzed the cash flow management challenges facing respondents, we look at how they used financial tools to manage those challenges. INCOME SEGMENTS AND CONSUMPTION SMOOTHING Respondents’ average weekly income had a profound effect on their ability to live within their means. On aggregate, higher-income respondents were able to live within their means and ended the year with surpluses. Those with high-income and low-variation had an average weekly surplus of ZMW 65, while those with high-income and high-variation had an average weekly surplus of ZMW 112. For the low-income respondents the picture was very different. On average, they spent more than they earned. Those with low-variation averaged a deficit of about ZMW 11 per week, while those with high-variation averaged a deficit of ZMW 33 per week (Figure 25). 32 Go To Menu