As an accountant, I’ve seen how successful businesses manage themselves. Most businesses do one major thing with their finances that sets them up for success: They know what is going on with their money.
At the very least, business owners keep up with their balance sheets and income statements. On top of that, they usually have a yearly budget, and many even do monthly forecasts to prepare for the future. Yet so many business owners don’t do the same thing for their personal finances. Here are four simple ways you can implement the tools you use for your business to improve your overall personal money management.
1. Income Statements for Income and Expense Tracking
You probably already create income statements on a monthly basis for your business to see how you’re performing. Why not for your personal finances as well?
My wife and I create and discuss our personal income statement on a monthly basis. One of the first things we look at is verifying that we’re spending less than we earn. We also take a look at our income and expense categories to see if they ended up where we expected them to fall. Without this important information, we could easily be spending more than we earn and not even know it. If a business spent more than they earned on a regular basis, they’d likely fail.
2. Balance Sheets – i.e., Net Worth Statements
Creating a balance sheet for your personal finances will show you how much money you’d have if you paid off all of your debt and sold all of your assets. While you’d likely never do this, you’ll at least know where you would stand if you did. My wife and I use our balance sheet to make sure we’re heading in the right direction with our finances. If our net worth (i.e. our assets minus our liabilities) is increasing, then we’re doing well.
3. Budgets to Predict Your Finances One Year in the Future
Many businesses go through the annual process of creating a budget, and chances are you do the same for your business, but probably not for your personal finances. My wife and I have done this in the past. While we never end up guessing our future income and expenses perfectly, this exercise does have some great benefits. Looking ahead allows us to prepare for big expenses that we don’t usually incur on a regular basis, such as our six-month insurance payments, large house repairs, and car replacement. It also allows us to set goals to maximize our finances rather than just go with the flow and take what we get.
4. Forecasts to Predict Your Next Month’s Income and Expenses
Most businesses regularly update their budgets for the rest of the year based on the most recent information that they’ve received. This is great for a business, but a bit extreme for most people’s personal finances. What my wife and I do instead is just update the next month’s budget with more accurate information. This exercise is usually pretty easy, since we have a budget template to work on.
We look at our income first, and make sure it still looks accurate. However, if we received a raise or our income has decreased, we’d adjust it. Then we take a look at our expenses. This is the side that most often changes. For instance, we might change what month we decide to go on vacation, and then adjust this in our forecast. We will also add in any unexpected expenses, such as parking tickets or unusual car repairs. Finally, we remove any expenses from our budget that we no longer incur. If we planned to buy a new laptop in the budget, but our old laptop still works fine, we’ll remove the expense. The result after all of our changes from the budget is our forecast.
These important financial documents help you successfully manage your business. Knowledge is half of the battle for your business, but that’s also true when it comes to your personal finances.
This article was originally written on October 25, 2017.
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