If you were a business, would you be a profitable one? At the end of each month, do you earn more than you spend? Is your enterprise profitable?
While individuals like us go to work and earn an income each month, few of us look at our finances like a business. However, just like a business, we need to earn more than we spend each month and regularly assess our finances to know we are on the right track. Follow these steps to start treating your finances like a business and establish a path to financial success.
The Business of You
Before getting into the tactical aspects of managing your money like a business, the first step is to get into the mindset of running your finances like a business. This means a mental shift in how you think about and interact with your money.
Businesses use accounting software to build a monthly income statement, or profit and loss statement. The people in the finance department can quickly run a report to view assets and liabilities in a balance sheet statement, which looks an awful lot like a personal net worth. Finally, they look at cash flow – whats going in and out each month. These are important perspectives to have when examining your money.
At the end of the day, businesses are focused on earning a profit for shareholders and other stakeholders. In the business of you, your family members are the stakeholders. You are the President, CEO and CFO. No one has more control over your money than you, so it is up to you to turn your money into a tool that works for you.
Your Income as Revenue
In personal finance, there is a golden rule: spend less than you earn. The first half of that equation to look at is your income. Businesses earn income by selling products or services, and you do the same. Every day when you go to work, you are selling your services to your employer and get paid for that service.
Unless you have a contract from your employer forbidding you from doing so, you are not limited to only working for your employer. You can add a side hustle on evenings and weekends to improve your income. Getting a raise at work or adding a side hustle can seriously improve your money situation.
A big piece of most businesses is to grow revenue. That may be a part of your job on a daily basis. Think about how you work hard to make money for your employer and take some of those same fundamentals to use extra time to make money for yourself.
Your Costs as Expenses
Businesses, like individuals, have to spend money each month to survive. The costs they incur each month appear to be very different on the surface, but actually have quite a bit in common. Both individuals and businesses have some minimum monthly expenses to survive, such as rent and utilities. Then there are the longer-term expenses that an investment in the future.
This is the second part of the spend less than you earn formula. If you dont have money left over each month, you are not a profitable individual or family. Businesses cant sustain losses over a long period of time, and people cant either.
Look at your expenses each month and try to identify major opportunities for savings. Big wins matter a lot more than pinching pennies. Cutting cable is a popular way to pull money out of your monthly expenses. Think about reinvesting the savings in a retirement account, paying off debt or investing in your side business. Or maybe its enough for a trip and spending money on experiences rather than things offers a positive return on family memories.
Focus on Monthly Cash Flow
While income and expenses are important numbers, they fit into the bigger picture of your monthly cash flow. Real estate investors, for example, dont look at profit and loss in the short-term. They look at the monthly cash generated by rent, the recurring costs and the leftover cash they can use to reinvest or keep for profit.
This is the perspective you should use when looking at your finances every day. Every income source you have is like a pipeline of money. Your job is likely the biggest pipeline, but there are others flowing in as well. Dont underestimate the power of multiple income sources.
On the other end, expenses are like a drain siphoning funds away from your savings and profits. Do everything you can to stop the leaks and keep each dollar you can. Every dollar counts.
Build a Successful Financial Life
Your financial life is made up of many components. Income and expenses lead to the most visible financial opportunities, but dont forget your investments, savings and other pieces of the puzzle. It all comes together and has a major impact on your long-term quality of living.
If you treat your finances like a business and can focus on profitability each month with a long-term focus on overall results, you should have nothing but success in your financial future.