Are you a business owner?  You might say no, but if you have a job, you are selling your services to a company and that makes you a business owner.  According to Wikipedia, a business is “a legally recognized organization designed to provide goods and/or services to consumers. Businesses are..…formed to earn profit to increase the wealth of owners.”  Do you see how this definition can easily apply to you?  We all work, “to earn profit to increase wealth!” The main reason any business exists is to maximize profits for the shareholders.  Why shouldn’t you have that same philosophy?

Even though you may not have a legally recognized company, you can still operate as a business.  Businesses have goals. They require planning, budgeting, forecasting, cost cutting, investing, and more.  To measure performance, they take periodic financial “snapshots” to determine how they’re performing. They use three primary financial statements; an Income Statement, a Balance Sheet and a Cash Flow Statement.  You can apply these same financial statements to yourself to see how you are doing.

Track Your Performance

An Income Statement is a statement of income and expenditure for a period of time.  For an individual with an income, it’s basically your take home pay.

A Balance Sheet is a summary of a company’s balances.  This includes assets, liabilities and equity (assets – liabilities = equity).  As an individual, your assets would be your savings, 401K, IRA, home value, and auto value.  Your liabilities would be your debt, which includes your mortgage, car loan, and credit card balances.  You take all your assets and subtract your liabilities and this gives you your equity.  The goal here is to build equity.  Maximize your assets and minimize your liabilities and you will maximize your equity!

A Cash Flow Statement is company’s cash receipts and cash disbursements over a period of time.  It lists cash to and cash from operating, investing, and financing activities, along with the net increase or decrease in cash for that period.  For an individual this is basically,(remove comma) how much money you made for the month minus how much money you paid out in expenses.  What’s left over is your savings.

In my opinion, the cash flow statement is the most important financial statement, because it drives how well you will do financially.  It’s all about how much cash you have at the end of the month.  Every heard the phrase “Cash is King”? The goal here is to maximize your cash receipts (income) while minimizing your cash disbursements (expenses).  If your cash flow is negative every month, there is no way to build equity and eventually you will be bankrupt.

I personally take a monthly snapshot of how I’m doing financially with these very same statements.  I also create financial goals and create a budget to help me get there.  I have a spreadsheet going back 4 years showing my progress.  Download Sample Financial Statement Spreadsheet.

First Thing’s First, Set Your Goals

Being able to track your financial performance is great.  But in order to know if you are doing well, you must first have a goal.  Let’s say your goal is to maximize savings.  How much do you want to save?  First, you have to figure out how much money you can save with your current income and expenses.   Download Sample Budget Spreadsheet.

As previously discussed, subtracting your monthly expenses from your net pay will determine the amount you have left over for savings.  Now, ask yourself if this will meet your goal.  If your goal is to save $500 per month, and based on your income and monthly expenses (remove comma) you can only save $200 per month, then you will have to look at your budget and make some changes.

• Things you may have to consider are:
• Cutting your cell phone bill from $75 to $50, saving you $25 per month
• Reducing your cable/satellite bill from $80 per month to $50 per month.
• Fixing that leaking water facet that is costing you an extra $20 per month.
• Eating out once per month instead of once per week, saving you $120 per month.
• Bringing your lunch to work (remove comma) instead of eating out every day, saving you $75 per month.
• Downgrading your car so your car loan is $300 per month, instead of $500 per month, saving you $200 per month. (How do you do that?)
• Shopping around for new auto insurance, saving you $30 per month.
• Cancelling the gym membership you never use, saving you $25 per month.

The point here is; most people can’t control their income, but they can control their expenses.  This is where you can save a ton of money.  From our examples above, if you were to cut your expenses so you could save an extra $300 per month, after just one year, you will have saved an additional $3,600.  Over 10 years that’s $36,000.  If you managed to save $500 per month, you would have $60,000 in ten years. That is a significant amount of money!

This may sound easy, but most people fail.  This is simply because they fail to plan by creating a budget, setting a goal and measuring their performance.  They fail to act as if they own a business!

See related article – “Keep Expenses Low for when the Hard Times Hit”

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