How To Use Your Business Financial Statements To Hit Your Personal Money Goals
When you have your own business, it's easy to focus on branding, visibility, advertising, sales and of course, your business finances. Staying on top of your business finances is important because it can help you determine the price of your products, if you can afford to hire help, what type of investments to make, and they can even help you decide how much to pay yourself. The same applies to your personal finances, they tell you how much you can afford to spend on housing, living expenses, investments, travel, etc. Your personal finances also dictate how quickly you will be able to reach your personal and money goals. Applying your business financials to your personal finances can show you where you stand so you can create a plan to achieve your money goals.
Income Statement (Personal Income Statement)
The Income or Profit & Loss Statement, it seems self-explanatory, right? Well, for your business the Income Statement will show the revenue and expenses for a particular time-period. The difference between your revenue and expenses determines if your business made a net income or loss. If you are continuously recording a lost or your net income is not where you want it to be, you may want to review your operating expenses in addition to your income and answer some of the following questions:
Was there an expense that was unexpectedly high this month?
Are there recurring expenses for software or other items that you are not using or receiving the full benefit from?
How much revenue did you make?
Do you need or want to introduce a new product or service?
Is one of your income streams not performing as expected?
Is this normal during this time of year or has this income stream never perform as expected?
In your personal life, you also need to know your income and expenses to create a plan to reach your life goals. It's important because you should always know the minimum amount you need to bring in each month to cover your monthly expenses. You can do this by evaluating your income and your spending (expenses), each month. This includes purchases made on credit. And I don't mean creating a budget. This is not a budget. A budget is a plan of how much income you plan to receive and how much you expect to spend. Your Personal Income Statement shows your actual income and expenses month. When evaluating your spending, the main question you want to answer is:
How much discretionary income do you have left after paying your expenses?
If your expenses are less than your income, that's money you can put toward your goals. If your expenses are more than your income, you need to 1) increase your income and 2) decrease your expenses. So you can get on the path to achieving your money goals.
Applying your business financials to your personal finances can show you where you stand so you can create a plan to achieve your money goals.
Balance Sheet (Net Worth Statement)
Your company's balance sheet shows if your business is healthy enough to pay for your day-to-day expenses if you have enough cash to make debt payments and your net worth. The balance sheet is based on the formula Assets = Liabilities + Equity (book value of your company). It can help you decide if you should invest in another company (or vice versa) or if you need to make some changes, like hiring staff so you can reach your next milestone. It also helps you make informed decisions, such as reducing the budget, cashing in investments or applying for/providing a line credit.
In your personal life, your Balance Sheet is your Net Worth Statement. So instead of Assets = Liabilities + Equity, the net worth calculation looks at that formula in a different way, Net worth (equity) = Asset - Liabilities. If your assets are more than your liabilities, then you have a positive net worth, and if your assets are less than your liabilities, then you have a negative net worth. Depending on your situation, a negative net worth does not mean you have been irresponsible with your finances, especially if you are in a position in life where you are just beginning to build assets. By tracking your net worth on a monthly basis, you will have a clear view of what you own and what you owe so you can use your net worth to determine what steps you need to take to reach your money and life goals.
Statement of Cash Flow (Personal Cash Flow Statement)
The Statement of Cash Flow shows the cash coming into and going out of your business during a specific period. It also shows how quickly your company's assets convert to cash and how well your business can pay its vendors. The Statement of Cash Flow is broken up into three sections: Operating Activities, Investing Activities and Financing Activities.
Cash from Operating Activities will show money received from the sales of your products or services.
Investing Activities shows money made or loss from the purchase or sale of your business' investments.
Cash from Financing Activities shows money made or spent from the sale your business' stocks and bonds, payment of dividends or the repayment of debt.
You would use the Statement of Cash Flow to decide if you can expand your business, invest in new projects or if you have the cash flow needed to attract investors.
You also need a Personal Cash Flow Statement at home. Your Personal Cash Flow Statement shows the cash coming in and the cash going out within a specified period. The difference between your Personal Cash Flow statement and your Personal Income Statement is the Personal Cash Flow Statement only focuses on actual cash movement where the Personal Income Statement will also include items paid on credit.
There are two sections in your Personal Cash Flow Statement: Cash Inflow which includes all sources on income, such as, salaries, interest, investment proceeds, etc. and Cash Outflow which includes all outgoing expenses paid out of your bank account(s). That includes rent, utilities, car payment, student loan, groceries, gas (auto), credit card payments, salon visits, etc. Your Personal Cash Flow statement helps you evaluate some of the following questions:
What are you spending your money on?
Does it align with your life and money goals?
If not, what changes do you need to make, so your spending will align with your goals?
Knowing how the financial statements in your business can be applied at home will make managing your personal finances easier while you are growing your business. Continuously reviewing your finances on a monthly basis will make it easier for you to reach your money goals and will also put you in the position to achieve your life goals such as traveling, investing in additional streams of income, buy your dream home, living aboard and more.