Think of all the challenges you must manage in life; money, finance, investing, legal compliance, personal development, organization, bookkeeping etc… It is almost as if you are running your own small business. Are you? In a way your life is not much different. You must generate revenue (income), you must manage your expenses and hopefully at the end of the year you are left with a profit (savings). Don’t do it correctly and eventually you are out of business!
Can we learn from business, how they operate, strategies they employ to improve our chances of success and profitability?
What is the objective of a company?
The most common answer is “to make money”, but most would be wrong. Once all expenses, fixed and variable, have been subtracted from a company’s total revenue they are left with a loss or a profit. If you invested $100,000 in friends company but it was only left with $1000 in profit at the end of a year you would not be happy. You would be better off putting that money in a high-yield savings account; with no effort you would make greater returns. Making money is not enough, a company needs to make sufficient profits to justify the risk and effort expended.
Let’s assume you invested $100,000 in a company and were provided a $10,000 return on your investment, this would certainly be better than the returns of a savings account and may be better than the returns of a basket of stocks. Over the next 5 years if the annual return never increased you would likely become discouraged. As an investor you not only want returns, you also want growth. Ideally as time progresses a company should grow in revenues, profits and in total value. A $10,000 annual return on top of an appreciating asset is something to be pleased about.
The objective of a company is to generate a profit and grow.
Why should you look at your personal life any differently? You too have a source(s) of revenue, be it a salary from a job or income from a rental. Like a business you have expenses both fixed and variable. Ideally you too want more revenues, more profits and ultimately your value or net worth to grow.
The “business of you” does differ in a number of significant ways from a business; laws, regulations, and tax benefits name a few. Conceptually however there are many theories, and techniques that can be adapted from a business environment for use in your personal pursuit of financial comfort and wealth.
Any well run business has a CEO or Chief Executive Officer. This person is responsible for setting the direction of the company, developing the strategic plan. There may also be a COO or Chief Operating Officer. This is the person that implements the strategy and oversees the executive management staff. Someone will take the role of a CFO or Chief Financial Officer to watch over the money, make sure that capital is utilized efficiently and oversee the expenses. Under these positions titles begin to vary widely. Be it president, vice president, or executive director as examples; you will have a broad range of responsibilities from Human Resources to attract, retain and develop staff to Regulatory Compliance to make sure the organization works within the law. You may also have marketing, production, sales or other positions. In a small company one person may have to take on the challenge of two or more of these roles. In a sole proprietorship, one person may be responsible for all.
In your personal life, you are a sole proprietor or at most have a partnership with your spouse. Between the two of you or alone you must ensure you live and work within the law because not doing so can be costly. You should work to develop your staff (yourself) to increase productivity or expand your capability making your “business” (you) more valuable. Depending on your job you may need to engage in the role of marketing, production or sales management. Certainly you must take responsibility for the role of Chief Financial Officer. By now you should realize that nobody will care about your finances more than you. In life, you are your own CEO setting plan or stategy with specific goals to achieve. You are your own COO responsible for impmentation of these plans working to ensure you achieve your potential.
Any good company recognizes to be successful they must continuously work to improve their performance in all these areas. They develop their staff and study changes in their field and in their markets. They look into the future trying to maintain a competitive advantage.
As an individual, whether you are financial advisor or fire fighter you should be, in part, looking at your life from the perspective running a business. At the end of the year you should have a profit (savings). The amount that you save should represent a comfortable return based on the investment of time, effort, energy and risk you put into your career. Like a business if the return is not what it should be you must reevaluate your strategy, execution, revenue streams and expenses and make the necessary adjustments to achieve the desired results.
photo by llawliet