Most people don’t realize it, but you are a business – money comes in and goes out. You sell something for which you receive payment. As an employee, you sell your time for money. As a business owner, you are an employee of the company and receive dividends when the company makes a profit or sells.
Wherever your income comes from, it goes into your bank account and is then spent on living, investing for the future, paying interest (if you have loans), hiring people (like maids,) investing in education, etc.
A business’s financial goal is to generate sufficient profit commensurate with capital investment, minimize the risk of loss, and maximize future profits.
In a business, you have several financial statements that tell you the health and viability of your business; these are:
- Balance Sheet (a snapshot of where you are at a given point in time.)
- Income & Expenses Statement (your total income minus total expenses reflecting your profit/loss)
- Aging Debtors & Creditors Statement (this is reflected in the Balance Sheet, and details who owes you and when it is/was due, and who you owe and when it is/was due.)
- Cash Flow Statement (tracks when money comes in and when it is due to be paid out.)
Without the above financial statements, it is impossible to properly manage a business—especially one that is growing fast. Most small business owners manage their finances ad hoc, going from crisis to crisis. This does not work and is very stressful. In a large business, the company hires a team of accountants and bookkeepers who report to a financial controller who oversees this vital area. In a small business, the owner/manager gets to it in order of which emergency comes first.
The key to taking charge of your personal finances is to run them like a business. The primary document that includes all the above financial statements for a company is the PERSONAL FINANCIAL STATEMENT (PFS.)
8 Key Benefits of a PFS:
- It tells you where you are financially at a given point in time. Are you reaching your goals? Are you moving forward or backward? Is it time to cut losing investments?
- It tells you how much you owe (debt) and how much you are paying in interest.
- It tells you what your estimated net worth is.
- Tracks how much you are spending, versus what you are earning.
- Identifies where you are spending your money and what your lifestyle is costing you.
- Identifies financial habits and beliefs that do not support you.
- Sets the stage to establish clear financial goals and track your progress.
- Facilities evaluation of current and new investments versus your financial status and goals.
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