This is a guest post by Eric Rosenberg, a full-time freelancer and blogger at Personal Profitability. Eric writes about personal finance and entrepreneurship at InvestmentZen, his own blog, and other sites around the web.
If you have trouble managing your money, you are not alone. Millions of people struggle every single day with paying the bills, keeping their accounts straight, and having enough leftover to save for an emergency, let alone retirement.
If this sounds like you, why not take a step back and look at your finances through a different lens. If you treat your finances like a business, and yourself like a financial analyst, you may be able to better identify your financial strengths, weaknesses, and put together a plan to enjoy financial success for years to come.
Create Personal Financial Statements
Every business tracks its financial health using financial statements. If you search for your favorite large company’s annual report on Google, you can find its financial statements posted online. To get an idea of what these look like, stop in and check out Google’s latest annual 10-K report here.
Of course, we don’t need to put together a 100+ page detailed report, just a simple one will do. The three primary financial statements you’ll want to look at are the Balance Sheet, Income Statement, and Statement of Cash Flow.
- Balance Sheet – The balance sheet is a snapshot of everything you have and everything you owe in one place. Subtracting your debts from your assets, you can find your net worth.
- Income Statement – The income statement shows how much you earned and spent over a specific period of time.
- Statement of Cash Flow – The statement of cash flow shows how much money came in and where your money went in terms of spending and investing.
If you want to learn more about personal financial statements, check out my guides here.
Diversify Your Revenue
If a company earns a significant portion of its revenue from a single customer, that is called “revenue concentration risk.” It is a risk because a problem with that one customer can completely bankrupt a company or destroy a product line.
For example, GT Advanced Technologies went bankrupt after losing its biggest customer in 2014. GT Advanced Technologies was a primary supplier to Apple for iPhone glass screens. When Apple changed suppliers, it destroyed the entire company’s business.
What would happen if you lost your primary income source tomorrow? For most people, that is a full-time job and losing it would mean a serious hardship. By diversifying your income and investing your time in side hustles, you are in much better shape to withstand a sudden change in income.
The root of business is earning a profit. Earning a profit requires earning more than you spend. Businesses and individuals can both utilize a budget to help plan for this goal. A budget isn’t something to restrict your spending, it is about planning and understanding your spending.
It is important to focus on both revenue and expense when budgeting. Don’t look at your income as a fixed number, look at it as something you can grow through hard work and focus. If you do well at your job, you can get a raise. If you do well with a side hustle, you can earn more. That is key to growing your wealth.
On the other side, do focus on big wins for your budget. Saving a few cents here and there is great, but finding recurring costs to cut and major expenses to avoid will have the most meaningful impact on your finances.
Be Your Own CFO
If you can stay focused and treat your finances like a business, you are essentially acting as your own Chief Financial Officer. Mastering your bank accounts, credit and loan accounts, and taking an active role in growing your income while cutting expenses will be hugely helpful in the long-term.
Even if things seem too tough to handle today, creating your personal financial statements will show you where you need to focus to live the life you want. Whether you want to travel more, save for retirement, or just want to feel more confident when dealing with your money, treating your finances like a business is the way to go.