I am a business
Many people run their finances like a bankrupt business: Money comes in and flows right out into things that are neither important nor essential.
Medium-sized businesses are acutely aware of spending, costs and money. They need to know when anything changes promptly so that they can plan for it. Big corporates tend to be laxer, as small differences only compound over time.
You are the same. You need to run your finances like a business.
Income streams
Make Thy Gold Multiply
-Richest man in Babylon, George S Clason
There are a variety of income streams that a business can have. As you might know already, there are active and passive income streams.
Passive income relates to income streams in that the business that does nothing – but still, gets an income. This includes property (rental), dividends and patents. These things give a business some form of surety that cash will keep on flowing into the company.
Active income relates to work that needs to be done to make money. This would include renting out hours of employees, selling products or rendering a service.
It’s important to note that a company’s risk profile (i.e. credit score) is dependent on how many income streams you have, as well as your ability to repay debt and your cash flow. If you have only one big contract – and you lose it – then the company will go bankrupt.
Income, expenses, assets and liabilities
Though a company could be big or small, it’s vital for it to have a budget. A company has an income statement, balance sheet and a statement of cash flows. These indicate where the money is flowing to and coming from.
With this information at hand, you can quickly tell how liquid the company is. Here is a quick breakdown:
- Income is any money coming into the company. This could be side businesses, employment and the sale of assets.
- Expenses are things that need to be paid. Think of it as running costs such as insurance and income tax
- Assets are things that give you money or can be exchanged for money. These include rental properties, stocks, bonds and intellectual property
- Liabilities are things that eat your money. These include debt, accounts and wages payable from your pocket.
What if the budget isn’t balancing?
When your expenses are more than your income, you are insolvent. You have difficulty covering your costs and your income is too little. Normally, a company will start by cost-cutting. This will include trying to cut their expenses to pay their liabilities and cutting their liabilities by selling assets to pay the debt.
If the company doesn’t have any assets to sell off, it is declared bankrupt.
This is why it’s so important to have a good financial standing – it’s exceptionally difficult to pick yourself up after a bankruptcy.
Efforts to balance the budget
Our budget is not nearly as complex as a company’s, yet we can learn a lot from how to balance the budget and make our books look a lot better. Here are some top tips:
- Cut expenses – I know this is easier said than done, but often people don’t need the expensive car, takeaways three times a week and extra YouTube binge-watching.
- Increase income – This can be done by side hustles or getting a raise, to name a few.
- Sell assets that have a big liability and eat away at your cash flow.
Fine-tune your systems
As a business, you have certain procedures and processes that you follow to get a certain result. For example, you might be paying your financial advisor a fee of 45% per year of your fund value to make more money for you.
Another example is the interest that you pay on your home loan.
Are you able to make the process better and still have the same benefit?
Have you renegotiated your fees/interest?
If you’re able to cut down on unneeded fees and expenses, it can make a big difference in the long run on your income and expenses.
Monitoring your finances
To make sure that your income and expenses tie up – and that the business is profitable, companies have teams that do reporting. They create huge Excel reports that no one ever looks at.
These reports are often displayed on dashboards. Dashboards are one page views of your business and finances. From this, the auditor will be able to see how you are doing financially. These highly intelligent people will often start playing with the data – they would build complex charts, predictive analytics and other big words to project costs, income and future earnings.
As a business, you need to do the same. You need to know with what you’ll be retiring, what you will need to retire and where the funding will come from.
Automate your processes
As a business, you can automate your processes. This means that you can put things in place to avoid unnecessary cash in the kitty that tempts you to spend money on things you don’t need.
For example, you can have debit orders go off from your account two days after income is received (payday), you’re able to streamline the process and automate the process to prevent you from buying takeaways with investment money.
Making yourself more attractive financially
There are a few things that you can do to make yourself more attractive financially. The reason you would want to do this is two-fold: firstly for peace of mind and secondly, in case you need to make debt (such as for buying a car or house), the bank will respond favourably. Here are some top tips:
- Check out your credit record and fix any issues. Check this out regularly for identity theft and fraud
- Create positive cash flow that goes through your bank account
- Have an emergency fund available in case something goes wrong – be better than most companies out there that died within a month of lock down!
- Build investments that will generate you cash
- Have insurance policies in place to cover any crisis or catastrophes
- Increase your assets that generate more cash flow.
- Have cash available for a deposit if you need to buy an expensive item such as a car or home.
- Budget for annual expenses
Conclusion
You are a business.
Money comes in and goes out of your account.
You have assets and liabilities.
Make sure you have proper cash flow in your business.
Invest in the future.
Happy investing!
Extra reading
- The college investor – How to run your personal finances like a business
- Rich Dad – Who controls your cash flow?
