When my wife and I first got married, we weren’t great with money. Thankfully we were always able to pay our bills – which helped us ignore just how bad we were.
Carrying a credit card balance seemed normal. The car payment was an accepted part of life. We had no plan. No investments, no budget – no consideration of our negative net worth. Our financial situation was one misstep away from disaster.
The Perspective Change
I already shared how I changed careers multiple times, and the story of ramping my side-hustle into a full-time business. As that business started to get serious, I had to get serious about running it. A big step forward was teaching myself some basic business finance. Through that learning, and success using it in the business, I had an epiphany. Those same principles and practices work for personal finances too!
Once we implemented certain business practices into our personal finances, things started to turn around. It was the start of our journey to understanding and the path toward financial freedom.
Here are three tips from common business practices that can help improve your personal finances also.
Get Familiar With Your Balance Sheet
A balance sheet in a business is a snapshot of the company’s finances at a point in time.
The balance sheet reflects all of the assets that the company owns. That includes cash, investments, inventory, and similar items of value.
The balance sheet also reflects all the liabilities of the company. This includes balances outstanding on any loans, committed obligations, tax liabilities and similar.
Lastly, the balance sheet reflects the shareholder’s equity. This is the difference between the assets and the liabilities. If the assets are larger than the liabilities, this positive value of how much equity the owners have. Of course, bigger is better for those owners! If the shareholder’s equity is negative, the company is essentially worth nothing.
Balance Sheet ~ Net Worth
In personal finances, this equates to a statement of net worth.
Your personal statement of net worth is a listing of all your assets minus all of your liabilities. I used to track this in an Excel spreadsheet and update it annually. Now I just use an online tool like Mint– because it’s free and super-easy to use.
Just like the balance sheet gives a snapshot of the health of a business, your net worth gives a snapshot of your personal financial health. One of the best measures of financial fitness is to track your net worth over time.
Here’s a screenshot of our net worth chart. That steady upward trend is the positive result that we’re looking for.
How to measure your financial success
How Is Your Profit And Loss (P&L) Statement Looking?
A profit and loss statement (P&L) summarizes all income and expenses over a period of time. An owner might look at P&L statements for each month, quarterly, annually or more likely all three timeframes.
The P&L will reflect all of the revenue the company generated, and show where it came from. It will also list all the different categories of expenses to help management understand where your money is being spent.
When the income is higher than the expenses, the business is said to have made a profit for that time period. And any profit causes an increase in the balance sheet – increasing the value of the business.
If the business is consistently spending more than it is making, well, at some point it’s going to run into serious trouble.
P&L ~ Cash Flows
You might be thinking that the P&L statement is essentially the same thing as a personal budget. That’s not correct though. The P&L is looking back at a period of time. A budget is going to look forward.
The more appropriate comparison would be to personal financial cash flows. This is what most people are checking when they look at Mint.
Oftentimes the cash flow statement, whether built by hand or one of those online tools, will be used before making your budget. It will reflect where your money has been going so you have a starting point to adjust as needed. It is also useful after the budget is made because it can help show if you are staying on track with your budget goals.
A good business owner or manager isn’t going to kick off a large project without planning it out first. They’ll want to know is needed, what that will cost, how long it will take, and when each cost might come due. They also often want to define some milestones – mini-goals – to know if the project is on track or not.
Can you imagine a company launching into a new product or solution without a budget? Just “going forward” without proper planning, hoping they can cover the costs and that the project will complete in a reasonable time?
I can imagine it because I’ve seen it. I’ve even made the mistake myself. It almost never ends well.
Big projects aside, running a business requires that you budget your resources so you know payroll can be covered each month. And that taxes can be paid, and supplies purchased, etc. Lack of proper planning for expenses has sunk many businesses. Unfortunately it happens all the time.
Three Budgeting Tips to Help Get You Started
Budgeting ~ Budgeting
Budgeting in business is almost exactly like budgeting in personal finances.
You personally need to plan in advance how you are going to spend your money. While you likely don’t have payroll (allowance perhaps) or other direct business expenses, you do need to plan. You need to make sure you can cover your housing expenses, utilities, food, insurance bill when it arrives, auto maintenance, etc.
Part of the budgeting process includes long-term goals too. Just like a business would budget for a future need, so should a personal budget. Make sure not to neglect big goals like paying for a child’s college, or a wedding, downpayment on a house, or the biggie: retirement.
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How These Helped Us
After understanding how essential these reports and practices were for our business, we started doing the same for our personal finances.
We knew that social security wasn’t going to provide enough income for us to live on and we would have to supplement it ourselves. That meant we needed to get our net worth to a certain level before retirement.
To get our net worth up to the level we needed, we knew we would have to pay attention to our cash flows and spend less than we made.
Budgeting was the main process that allowed us to do exactly that. We told our money were to go and assured spending was in line with our priorities and personal goals.
What Does Financial Success Really Look Like?
How About You?
So you can see how all three of these tie together.
Budgeting -> Improved Cash Flows -> Improved Net Worth.
Have you already implemented these reports and processes? If not, what’s holding you back? Let us know in the comments below.