I watch shows like The Profit on CNBC and Restaurant Impossible on Food Network and the common thing between these shows is how most of the business owners don’t know basic information about their finances.
As a business owner I’ll admit that I may not be able to answer all their questions off the top of my head, but I have meticulous records and I could have an answer within minutes. Can you do the same for your personal finances?
Salary versus income
This is the first thing that people often get wrong. In business it’s the difference between revenue and cash flow. Say your salary is $100,000 a year, that’s $1,923 a week. But that is not what you take home. After taxes, health insurance and other deductions, like your retirement savings, you are saving for retirement right, you could easily be taking home only about $1,000 a week or less which is just $52,000 a year. Live like you have 100k and you’ll be broke all the time.
Here are my questions for you: what is your net worth? What percent of your gross income did you save in 2014? If you can’t answer them immediately can you get the answer in less than a few minutes?
Forget the debate on whether a house is an investment or not, what some people do with their homes in the name of investment can be downright silly. For example, renovating the kitchen, bathroom, or basement might add some value to your home when it’s time to sell but it’s not an investment, it won’t appreciate beyond the value of the house as a whole. You can’t sell your kitchen renovation when you’re short on cash.
In business every investment has an ROI, return on investment, meaning that if you spend $100 on a new piece of equipment it better increase your income by $200 or more (because you don’t invest to break even). Then there are capital expenses and that’s more like the kitchen upgrade, it may not make you money but it’s necessary to function.
A hobby is not an investment even if you consider it a business. Unless there is potential for this hobby to be your sole source of income it’s just not an investment. I’m not against hobbies or even having a little side income but inflating what it is doesn’t help.
Stretching is for exercise
Too often I see people reach beyond what they can afford for what they want (even so called experts). They want a new car but the payments are too high so they lease it instead, a couple with one child in a two bedroom home say they’re outgrowing it and buy a bigger house they can’t afford, they want a vacation home and overestimate the rental income they will get.
All these examples are people who stretched to afford something but they all run the risk of pulling a muscle to keep the analogy going. Instead, buy the car one model lower, stay in the house longer, only buy the vacation home if you can afford it without renting it out, and still rent it.
Successful business people look at every expense carefully, they don’t spend unless it’s necessary or will lead to more income.
What are some things you feel people could do better if they ran their lives more like a business?
Posted in Business, General, Money, Success and tagged business, expenses, hobby, income, investing, spending by AJ with no comments yet.
We all want autonomy. We want people to answer to us, we’re tired of answering to others.
Long before I opened the doors to my business I knew that the romantic view of working for yourself was false. Now that I’ve been in business for a couple of years I realize that I was underestimating the reality. At my day job I have one person I have to answer to directly. There are a lot of people above me but I answer to one person on a daily basis.
At the spa I own I have over 10,000 people I have to answer to. Every client that walks through the door is my boss. Most of the time the interaction goes very smoothly but when it doesn’t I have to answer to them. But I underestimated who I had to answer to by not also taking my employees into account.
I know there are people out there who are talking to their computer (or smart phone or tablet) saying “you’re the boss, the employees answer to you.” And that’s how I know you don’t own a business. Yes, I have hired and fired, I have disciplined and praised, but the truth is that without the employees I don’t have a business. I have to respect the employees and to that end I let them know exactly how important they are by telling them that before the doors opened I was the most important person in the company but once the doors opened each of them were far more important than me. They interact with the client, they provide the service and if it’s a great massage or a wonderful facial then they deserve the praise but if the client isn’t happy they also deserve some of the blame, I deserve the rest.
You will always be working for someone else so the question you have to ask yourself is whether the work is fulfilling enough to make it worth while.
Posted in Business, General, Leadership by AJ with no comments yet.