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How to Understand Your Financial Picture

By Michael Zipursky

Last night I was sitting down with my wife sipping a cup of green tea to unwind from a long and busy day.

I turned on the TV and the first program that came on was called Till Debt Do Us Part.

No, this post isn’t about debt, marriage or relationships – let’s save that for another day.

Have you ever seen this show? They profile a couple that are in serious financial trouble. The reason? It’s almost always because they lack any understanding of money and finances.

In this episode they featured a husband and wife. They were making over $100,000 a year in combined income. They also owned 3 investment properties.

Here’s where things get interesting…

These two believed that they were making money from their rental properties each month….when in fact they were losing money each month and going more and more into debt.

I don’t claim to be any kind of financial or money management guru. But from a young age I did have the basics of saving, investing and conservative spending drilled into my head.

It Has to Be Asked
The scenario of this husband and wife begs the question…”how could they not know they were losing money?”

Duh…..right? Well, you’d be surprised by how many people don’t have their financial lives in order.

Many people prefer to leave that side of their work and lives to chance. If things seem okay, they must be okay, right? Sorry but that isn’t the case.

When is the last time you took an inventory of your business’ financials? And I’m not just talking about at tax time!

Here’s how it goes:

  • Make a list of each of your clients
  • Write down how much money you’re making each month.
  • Attribute all of the money to each client or other source.

Result? You now have a very clear picture of where your money is really coming from.

Not all clients are made equal. Clients that support you more, should be supported more too.

Next let’s see where the money is going:

  • Make a list of all of your monthly expenses.
  • Monthly rent or mortgage
  • Auto
  • Insurance (auto and life)
  • Gas
  • Parking
  • Meetings and Coffees
  • Subscriptions
  • Marketing and Advertising
  • Utilities (Heat, water, etc)
  • Phone (Mobile and landline)
  • Internet
  • Gifts for clients
  • Supplies
  • Contractors (outsourcing)
  • Postage
  • And any other expenses

Now go through that list and mark down how many of those expenses you have each month on a regular basis.

Your Money Position
Next you can take a look at how much money you have coming in each month vs. how much is going out.

If you want to get an even better picture, go to your local government’s website and find out what tax bracket you are in.

Project Your Income
You’ll then be able to take your approximate net monthly income. Project it forward for 12 months and figure out how much tax you’ll have to pay on that.

That will give you a good idea of how much money you’ll actually ‘have’.

You can do as much of this process as you want. There are far better and more complex ways to go about this…

A Worthwhile Exercise
The whole idea here, and what I’m encouraging you to do is ensure that you have a clear picture of your finances. Not just in your head (everyone says they know…until they figure out they really don’t know). And the way to really know is to put it down on paper and go through it.

This is a worthwhile exercise that won’t take you longer than 30 mins to 1 hour.

Do you have any tips you can share that have worked for you to manage and keep on top of your finances? Share them in the comments below.

4 thoughts on “How to Understand Your Financial Picture

  1. Bob Sundquist says:

    I couldn’t agree more, this article rings very true to me as I am in the business of consulting small-medium size companies on proper financial management. Many small business owners undervalue the financial reporting aspect of business and tend to see it purely as additional overhead. I help them establish a financial foundation that allows them to proactively manage their business to drive performance, maintain stability and spur growth.

    Bob Sundquist

  2. The list here is the kind I often give for business owners to refer to when projecting where they are and where they need to go as a business.

    It is important to have a good idea of how much money you expect to earn and how much you shall be spending in the short, medium and long term future.

  3. D J Easter says:

    Knowing where your money is going, especially since the biggest reason businesses fail is under capitalization. I recommend using an easy accounting software like Quickbooks to track your business.

    Not only can you tell how much cash you have, but also it makes it easy manage your receivables. Also, you can get financial statements for your business. Understanding financial statements is so important, but so few small business owners know what the financial statements are telling them.

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