You Are Your First Business
As mentioned in my previous article about management, you are your first business. The intricate metaphor continues as we dive into finance and accounting. A good manager finds a way to create value, so now that you’ve created it, what do you do with it? As you probably guessed by now, there aren’t too many differences between what you do with your money and what a functioning business does with theirs. Currently, our grade school system does not teach what money should be used for. Why? Well that can be debated in many ways from multiple different points of view, but that would extend beyond the scope of this article. I simply want to make the business -to- individual comparison in hopes of uncovering a more distinct perspective.
If you wanted to look into your favorite business’s money situation from a 5,000 foot view, you would simply go on websites like yahoo finance, google finance or MSN money to view their financial statements. The main statements are the income statement (profit/loss) and balance sheet. You can also get the statement of cash flows, but may have to look deeper into the company’s annual report for that. However, I’m pretty sure the business of You doesn’t have an income statement, balance sheet or statement of cash flow… or do you? Hopefully by the end of this article, you will have an understanding of your own financial statements where you can take a 5,000 foot view look at yourself when it comes to value.
“Control your cash, stick to your core business, and know your numbers.” – Marcus Lemonis (The Profit)
The Income Statement (profit/loss)
Also referred to as your P&L statement or profit/loss statement, the income statement simply shows how much money you made and how much money you spent. The difference is usually what you added to yourself in value. I say “usually” because a parent for example will add to their children’s educational fund just as a business would distribute dividends to their stockholders. Do you spend more than you make? Is the spending more for luxury, or do you take whatever money left over from bills and invest in yourself?
Whatever you do with that excess money, the government wants a piece of it. The IRS is a government agency designed to collect that excess in the form of a tax. You’ve probably heard of the saying that there are only two guarantees in life: death and taxes. When I studied accounting in college, I took 8 accounting courses and they all had one goal in mind, pay less in taxes. The business of You, like other functioning businesses look to pay less in taxes. Some businesses go above and beyond to avoid paying crippling taxes.
Take the biggest pharmaceutical company in the U.S. Pfizer as a perfect example. In late 2015, they utilized the law to do a tax inversion and merge with Ireland based pharma company Allergan. By merging with Allergan they would be saving 8% percent in taxes on the billions of dollars in profit that they make each year. The Obama Administration and the treasury department has recently blocked the merger. Individuals have gone to jail for many years for tax evasion. Always consult with a tax professional to find ways to lower your taxable income without breaking the law. Billion dollar businesses do it and so should you. Chances are, you will not be blocked if you stay within the realms of the law. The Pfizer – Allergan deal was blocked simply because it takes billions of dollars out of the American economy while earning mostly American revenue.
Your net worth as an individual is how much you own minus how much you owe. So your total assets minus your total liabilities. If you owe more than you own, you are essentially worthless. Of course this doesn’t consider your earning potential. When you read a business’s balance sheet, you will see their assets, liabilities and equity, so the same formula applies. Do you ever think about what you consider assets as an individual? Sure, we all know our credit card, student loan and mortgage debt. We are so focused on paying that off. However, we rarely hear people talk about their assets.
Assets are bundles of value that help you create more value. A Coca-Cola asset would be a bottling machine. Chipotle has an inventory of food that they consider assets. What are your assets? What helps you create more value for the business of You? This may be a tad difficult to think of off the top of your head, but we all have assets that we can use to create value. Your computer can help you learn, organize and perform money generating activities. Your kitchen utensils could be assets if you were to sell the food that you cook with them. Identifying opportunity is about identifying assets.
I was helping one of my clients with their balance sheet on Quickbooks. Quickbooks is just another accounting tool that Bryant Capital Solutions help individuals analyze for tax purposes. He didn’t know what items he could use as assets that could be written off for tax purposes. He was satisfied when I showed him ways to save and earn money using those assets.
My cousin and I would put together spreadsheets of individuals who were actual human assets. Just being associated with them can help drive value for the business of Us. Understand what items or people in your life can help create value for yourself.
Statement of Cash Flow
It’s important to know where your money is going. 99% of cash flow activities can be categorized as the following: operating activities, investing activities and financing activities.
The business of You will continue to have more and more bills as your lifestyle advances. Bills such as rent, phone, water and internet are your monthly recurring bills that businesses also consider their operating activities. These bills can sometimes be burdensome for both individuals and businesses. An effective way to manage these cash flows is with an operating budget.
I had a client who needed to provide a forecast of his operating budget to secure office space. He was happy that I was able to extract his numbers from Quickbooks and do some excel magic to help him make better forecasting decisions.
When I secured my Masters in Finance, I got a handful of inquiries from friends and clients about investment advice. My first instinct was to point out the economic environment: low interest rates, weak dollar, low oil prices, crippled China economy and recommend companies that benefit from those factors. However, I wanted to make sure that my friends understood investing for the long run.
Investing in yourself should be everyone’s number one priority first. Why? Well even the billion dollar corporations do it. They invest money into research and development; which we would call knowledge on the individual level and their core competencies; which is the ability to make money on the individual level, before investing in other companies. Diversification is important, and having a bit of money in the stock market is not a bad idea if it is diversified. However, you should trust the business of You to make money before you trust anyone else.
Invest time and money into your education and skillset. This will make you a living breathing asset that people will be willing to pay for.
Companies use other people’s money to create value that they couldn’t have created on their own. Even if the company could drive the value that they wanted to, using other’s money is a way to earn a higher return on investment, since technically you aren’t investing your own cash. You should consult with a finance professional before using heavy amounts of debt. Leverage ratios are considered because there is a certain risk-to-reward threshold that businesses and individuals should always consider.
Like your own personal credit, businesses have credit ratings, which are determined by these leverage ratios. This will let the lender know how much they should lend and for how long. Debt is not bad. In fact, not having debt can freeze up the capital markets and bring our economy to a screeching halt. Having too much debt is where it gets ugly which is why we have credit ratings to monitor the financing activities of both individuals and businesses.
Finance and accounting can be a mouth full. Companies invest serious amounts of money into professionals who speak that language. It’s one thing to be a manager who can drive value. It’s entirely another to be a financial professional who can use that value to create more value while you concentrate on your key value generating business activities for the business of You.
Look out for the next Business of You article. We will be talking about marketing!