Living on the Financial Edge: The Different Techniques and Tools the Poor Use in Cash Flow Management

This paper reviews patterns of financial behavior and decision-making processes among small entrepreneurs and poor households.

The paper is based on literature review, experiences in Asia and Africa and a survey conducted in Indonesia. It states that:

• The poor base financial decisions more on frequency, stability and predictability of income than on absolute income;
• Expenses can be classified on the basis of frequency, predictability and negotiability;
• Planning for expenses of fixed frequency and amount is easier than preparing for unexpected events;
• Cash flow management techniques include diversification of income sources, savings and reducing or deferring expenses;
• The poor use linkages with friends and family, money lenders, and savings associations to manage cash flows, but rarely approach commercial banks;
• Risk coping mechanisms involve measures such as saving, borrowing and selling assets;
• The poor can benefit from simplified life insurance coverage given the high frequency of risk.

The poor need flexible financial products that address their special needs and characteristics. The article states that microfinance should aim to be a channel for financial access rather than a poverty alleviation tool.