The title of this post probably has you wondering what on earth I’m talking about. In many ways, it’s good to run your personal finances like a business. You should track your spending, project future income, analyze costs, and look for ways to be more efficient. But in one very important way, you do not want to run your personal finances like a business, and that is your income:expenses ratio.
Let me start off by saying I know next to nothing about business finances. So I was shocked as hell when my company’s CFO put up a graph during a presentation that looked something like this:
Your reaction may be similar to mine. I thought, “how can a business possibly be sustainable if they’re always spending nearly all the money they take in?” My company certainly seems successful, but I started to worry that we were spending too much money and eventually it would catch up with us. I also began to understand why our finance team is always checking the mail to see if any checks arrived and asking me about any bills that might be coming up in the next month for my department. The budget is so tight they need to have an accurate estimate of expenses for the coming months.
“Surely this can’t be a good business model,” I thought. So I talked to some people around my office with more business knowledge and they assured me that this kind of budget is perfectly normal in business. “But I’d never run my own finances like that!” I said. “I know,” they said. “But we’re a growth company, so we need to reinvest most of our revenue back into the company so we can continue to grow. The graph is actually very good because it shows that we’re continually increasing our revenue.”
Now it made sense. To grow and maintain a competitive advantage, my company needs to continually hire new employees, invest in research & development, invest in marketing, buy more computers and phones for its growing workforce, buy more software to automate business processes, and probably numerous other things I’m not even aware of. Of course my business’ budget looks nothing like my personal budget, I don’t need to do any of those things!
Every dollar a business spends goes toward the goal of increasing revenue. The hope is that the additional dollars spent on all the things I listed above will translate to an even higher dollar amount in revenue. So if you’re spending your entire paycheck, ask yourself if you’re putting your dollars to work in the way businesses do. Did all that money you spent help you get a promotion? A new job? A side business? If you’re spending all your money and it’s not helping you earn more money (hint: it’s probably not helping you earn more money), you should stop spending all your money. If your gut reaction to the above graph is not “holy shit, that looks like a precarious situation to be in,” then you’re either familiar with business finances already or you spend too much money. If it’s the latter, keep staring at it until it looks scary.