Businesses, like people come in all shapes and sizes. From big corporations, partnerships to sole proprietorships and LLC’s. These companies can range from businesses like Apple or Google to your sisters haircutting service or the local popcorn salesman on Main Street. You are a business, every day you make financial decisions and transactions with your finances to better yourself. You are constantly mirroring the acts of businesses all around you. Therefore, in order to be financially successful in your life you should always be thinking and acting like a business would, except instead working for a product or service, you are in business for yourself and your product is a fulfilled life and financial security.
Budgeting with a ‘business sense’ is one of the tools that will get you there. A budget can be created by using the information from 3 different statements that businesses use everyday. Like any business, you need to keep in touch with your accounting and finance department regularly in order to make smart life/financial decisions. This way you are aware of where your money is going and how you can make it work for you in order to get the best possible return. Using these statements or a financial tool like mint.com will help you keep track of your finances and how much you are spending and are going to spend on your “business”.
This is the statement that shows you your income in relation to your expenses. This statement usually is a single column report with income at the top showing your personal revenue. It doesn’t matter if the money is coming in from your job or other alternative sources of income., this just shows your inflow. The expenses are your outflow. The report will give you your NOI (net operating income) which is basically your personal profit. This will let you know if you are spending too much money. This way you can tell if you need to stop shopping in SoHo on Saturdays or buying too much late night pizza on the Lower East Side at 4am.
(Click to Enlarge)
The balance sheet is your statement that tells you your net value at any given time. This statement breaks down your assets and your liabilities and what you physically own (equity). Here you will show your assets on the left column. These are things like your cash, money that people owe you, your car, house, value of your investments etc. The right side has your liabilities. These are your debts, such as loans that you have yet to repay for a house or car, and/or your credit card debt. The left side is also where you put your equity. This is essentially your value or ‘net worth’. Your assets are going to equal your liabilities plus your equity. So the right side should equal the left. See below for a visual representation.
Statement of Cash Flows
The statement of cash flows is important because this is where you are able to financially model where you will be at any given point in time. this future value is based on certain assumptions such as how much you predict you will be making and how much you will be spending at a future point. This shows on a scale of time your income minus expenses. It is usually a good idea to stay on the more conservative side because the future is never certain. So it’s good to not overestimate income and underestimate expenses. Using this statement is helpful because you can see where in the future you will be able to afford more expensive things like a new car or vacation. This will keep you prepared. Click on the visual to see how this works.
Even if you’re personal versions of these statements are on the more basic level that is okay. You are still making progress and will be more financially informed about your money. These are just power-ups to bring your budget to the next level. I would recommend updating them once a month, so you can always have an accurate sense of where you are. When finances are constantly on your mind you will be more self-aware when spending and save more money.