Preface
Your life is NOT just a profit and loss (P/L) statement and a Balance Sheet (B/S) but if you are making it to this site and contemplating different personal finance decisions I always find it best to structure any answer to your personal finances around financial concepts that have been around for thousands of years: financial statements.
Yes there is the “personal” aspect to personal finance but that typically drives how your personal P/L and B/S evolve over time. Given this is one of my early posts and a core principles post I’ll take some time to define the components of standard financial statements in a personal finance situation for context or reference for those that aren’t around financial statements as often as I am.
I took the time to explain all of this in one sitting / page and will likely refer back to these and have set this up as a page vs. a post for future reference if needed.
Profit and Loss Statement
Revenue
Revenue and the growth of revenue is what all sustainable companies (eg not all startups in their infancy) eventually focus on…. without revenue a business doesn’t really exist or at least not for long. An individual with no revenue from a personal finance perspective can’t expect to sustainably survive financially as everyone has expenses every month.
While obvious for most – here are typical revenue streams from a personal finance perspective:
- Wage and tip income for you
- Wage and tip income from your spouse or partner
- Investment income – interest or dividends
- Passive income from another investment – such as rental income
- Rebates/cash back from your credit card if you use them
- Selling things in your house or as part of a business
- Some other side hustle
Fixed Operating Costs
All businesses typically have fixed costs that are hard to shed or reduce costs further such as manufacturing equipment or a bunch of IT servers. Corporations looking to save on fixed costs typically have to reorganize or invest heavily to reduce fixed costs. From a personal finance perspective these are also hard costs to shed.
From a personal finance perspective everyone typically has fixed costs, here are examples:
- Housing expenses – mortgage or rent
- Home owners association dues and property taxes if you own a home
- Day care if you have kids
- Core utilities – power, water, internet etc..
- Tithe or Other Donations you give monthly
- Retirement contributions or other savings goals
Variable Operating Costs
All businesses typically have costs that go up and down due to the amount of volume or number of days within a month – these costs are variable costs. Personal finances typically also have variable costs that are not a fixed amount each month.
Examples of Variable Costs from a personal finance perspective:
- Food – quality, quantity, and frequency can all drive this
- Entertainment – dining out, number of events, etc
- Lifestyle choices – alcohol consumption, gym membership, Netflix, etc..
- Car expenses – gas typically being the primary driver but tires and maintenance can go up or down with mileage
- Home expenses – all of those Home Depot or Container Store runs
- All other necessary bills – eg Dry cleaning, wireless bill etc
****Important don’t skim over****
A Variable Cost Driver is what drives a businesses’ cost up or down – typically this is volume driven. From a personal finance perspective these drivers can be:
- Weekends….. I loathe a five weekend month as I don’t typically have five weeks of pay to cover the cost
- Number of social events planned
- Days in a month
Taxes – Fed, State, Local, and FICA/Other
All Corporations pay taxes and it is a true cost to your personal P/L. Similarly, almost all individuals pay some amount of taxes every year.
Corporations typically have massive tax departments to manage this expense and from a personal finance point of view you should also give it consideration and not just blow off this expense as out of your control.
We will explore in further posts how to attack and control taxes.
Profit
My favorite – Profit! From a corporation’s perspective this is the cash that is left over after all the dust settles. Yes there are some non-cash charges such as Depreciation flowing through the financial statements; however, most individuals won’t have these show up outside of their tax calculations, if at all.
Wall Street has and always will be focused on profit growth or stable profit (depending on where a corporation is in growth cycle) over time as Profit allows for reinvestment into profitable ventures to drive more profit long term or distributions to share owners in the form of stock buybacks or dividends.
Profit from a personal finance perspective is ultimately an opportunity to deploy capital every month towards one of your financial objectives. This applies to everyone – even if you are retired.
Common uses for personal finance profit:
- Save it for a rainy day – cash
- Invest and make more profit
- Pay down debt to make more profit
- Upgrade an asset/lifestyle
Profit and Loss Statement – A Summary
A key thing to remember about a Profit and Loss Statement is the fact that it is time bound for Corporations and for Personal Finance Perspectives.
Most individuals should look at their Profit and Loss statement within a given month to make sure your budget is balanced but some individuals may find it helpful to look at their expenses over a full year.
I look at mine on a monthly basis and rarely look at a full year as I’ll explain in some of my future posts.
A picture is sometimes worth a thousands words… here is the above in a nice neat chart.
The Balance Sheet
Cash, Cash Equivalents, and Short Term Investments
Cash, cash equivalents, and short term investments represents cash that a Corporation can easily get their hands on quickly and is considered not invested for a time period more than one year.
From a personal finance perspective this is everything in:
- Your bank account
- Your savings account
- Any brokerage account that has investments that you can easily liquidate if you need to and are not part of your “long term investment strategy”
Corporations have large Treasury groups that oversee this bucket of expenses and you should not overlook this as an area to manage.
Long Term Investments
Long Term Investments are strategic decision you have made to invest your capital for a long period of time that is in excess of a year.
From a Personal Finance perspective these investments should be funds you have set aside for a purpose of generating income for your personal P/L long term either through interest, dividends, or through sale of principal capital OR this is an asset you plan to pass down to heirs or a charity long term. If the asset is never expected to generating income ever…. what really do you own and why do you have it?
From a personal finance perspective these investments typically are:
- Your retirement account – 401k, 401g, IRA, etc…
- Real estate that is not your primary residence
- Any investment in your Taxable Brokerage account that you intend to hold
Property Plant and Equipment
Property Plant and Equipment for a Corporation relates to all of the physical assets owned (sometimes leased if GAAP accounting rules are met… not worth going into this rabbit hole) that are needed to generate the P/L for the business.
From a personal finance perspective these are all of the assets that help you generate your personal P/L and typically relate to:
- Your home (only if you own it) so that you can make it into work every day refreshed or work from home
- Owned car, motorcycle, or other transportation (only if you own it) so that you can make it into work every day or use it for generating income
- Your spouse or partner’s car only if you own it)
What is not included:
- A rented property – that is not an asset
- An extra car that you do not need to generate income – that is a short term or long term asset that is likely depreciating (losing money over time)
All Other Assets (Typically Intangibles)
Corporations have all sorts of other assets that lumped into “Other Assets” on their books as well as Intangible Assets related to acquired businesses, patents, deferred tax assets, etc..
From a personal finance perspective – I really don’t think it is worth tracking these types of assets over the long term as these assets typically don’t ever move.
Examples of Other Assets you might have:
- Cash due to you / Accounts Receivable – you are expecting cash to come to you but you haven’t received it yet (e.g. tax refund as an example). In my opinion you either have the cash or you don’t so it’s not worth pretending to have an asset here
- Any degrees you have – Masters, Bachelor’s, GED, etc..
Short Term Liabilities (Debt)
Short Term Liabilities are typically liabilities that are due for a Corporation in the next year such as bonus payables, known large contracts with payments, etc.
From a personal finance perspective I think it is best to deviate from standard financial statements and think about these as bills that are due within the next month with the full amount owed and/or there isn’t a payment plan attached. These liabilities typically include:
- Amount owed on your credit card
- Your known variable and fixed operating costs due in the next month
- Bills you need to pay that are typically unique – getting new tires for your car, vehicle taxes owed etc.
Long Term Liabilities (Debt)
Long Term Liabilities are typically liabilities that are due for a Corporation in over a year and relate to the underlying structure of how the business has been financed and typically have set payments.
From a personal finance perspective these debts typically include:
- Home Mortgage
- Second Mortgage if applicable
- Car loan
- Student loan
- Other personal finance loan, HELOC, or other long dated (more than one year) debt……….. a rooms to go set financed over 36 months as an example
Equity
Equity is the Excess Value of all assets minus all liabilities for a Corporation. Corporation’s on their financial statements typically split equity up into several categories but those are irrelevant for Personal Finance from my perspective.
From a Personal Finance Perspective, Equity really is your Net Worth……… if you liquidated all of your assets and paid off all of your debt – how much cash would you have (or your heirs) have on hand?
When you compare Equity moments in time (This year’s equity vs. last year’s equity) you can also determine if you are growing your Net Worth or shrinking it.
Balance Sheet Statement – A Summary in a Picture
A key thing to remember about a Balance Sheet Statement is the fact that it is a snap shot in time for Corporations and for Personal Finance Perspectives. E.g. it is the balance sheet as of July 1, 2018 or July 19, 2018 or December 2014.
Most individuals should know where their balance sheet sits at any given time as it really is your score card to how your finances are progressing.
A picture is sometimes worth a thousands words… here is the above in a nice neat chart.
