The Family Business

As someone who in a previous life spent a lot of time creating and interpreting business spreadsheets I like to look at running our family’s finances in much the same way as I would a business.

The key to any business is that on a month to month basis your incomings should be more than your outgoings. This would be your profit. For a household this “profit” would be your savings; your spending is less than your income. Now clearly if you are retired than your incomings are a lot less and would actually be less than your outgoings. However if you have a monthly budget then you can consider that budget a “virtual income” as your goal is for outgoings to be less than your budget.

In a business you always have fixed outgoings. These are outgoings that are the same month to month and help you to keep control of your monthly numbers and help you to determine how much income you need to generate. The biggest fixed line item in business will be employees wages and salary. Yes there will be some variation due to overtime and promotions, but typically this will be the same from month to month. In a household, the closest analogy would be utility bills or mortgage payments. Although there will be some seasonal variation in heating bills etc, typically you have a pretty good idea as to how much will go out on a regular basis each month.

If you are running a business, then its vital to haveĀ  control over your outgoings and having no surprises. Any sudden large expenses will completely ruin your monthly profit and you will get nasty emails from accounting. So in that case, typically, large assets such as a new building or computer system will be amortized across multiple years. The same can be true in a household budget. If you have to pay something like property taxes all in one go then it can make your monthly budget look bad. So if you can amortize large expenses on a monthly basis then it will definitely make it easier to control your budget.

For most people the largest yearly item are property taxes, but there are other large one offs such as car and house insurance, yearly vacation etc. If you have a mortgage you likely already amortize property taxes and house insurance through your escrow account. For those without a mortgage it might be worth considering having a separate bank account and putting a set amount in each month and pay the large one offs out of it when required.

The biggest difference between a business and household accounting statement is that in business you typically have no control over fixed expenses (such as wages) some control over variable expenses (such as travel budgets and client entertainment) and full control over income (by pushing for more sales etc.) In a household you have no control over fixed expenses (utilities) or income (your salary, social security etc) but a high level of control over variable expenses (entertainment, eating out, travel etc.)

At the end of the day in both models you want

income >= fixed expenses + variable expenses

the only difference is how you achieve it.

At the end of the day the techniques that you might use in running a business are in many ways similar to how you can run a household’s finances and certainly skills with running and analyzing spreadsheets has proved invaluable to me in keeping a good handle on how our personal finances are doing.


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