This is a guest post from Pinyo, the author of Moolanomy Personal Finance. His blog covers a wide variety of personal finance topics including income building, smart spending, investing, and financial planning. If you like this article, please consider subscribing to his blog.
What are the three most important numbers in the business world? While there are a lot of numbers, the three most important ones in my experience are revenue, costs, and profit. Or you can sum it up all into one word: cash flow. And these three numbers should be the most important numbers for you too when it comes to your finances. If your personal finances are a profitable business, then you’re building wealth — otherwise, you’ll be accumulating debt.
So how can you improve your finances by thinking like a business owner?
Cost Control And Cost Cutting
When the economy went south this past year, you constantly heard things like company X is laying off 5,000 employees and company Y is shutting down plants. At work, you probably hear things like cutting bonuses and raises, stopping 401(k) matches, or halting all non-essential trips and meetings. Why? Companies cut costs because it’s the quickest and easiest way to maintain profitability.
If your finances are in the crapper, you should think like a business owner and look for ways to save money. If you search around the web, there are literally thousands of ideas on how to reduce your expenses. Here are a few articles to help you get started:
- How To Save Money – The 1,001 List Of Money Saving Tips And Ideas
- 95+ Money Saving Tips From The Readers!
Personally, I have a simple two-step process that I use to cut expenses:
- Look at recurring expenses first. These are things that occur monthly. I like to reduce these first because you get the multiplication effect each month that follows. For example, rent, mortgage, telephone, utilities, subscriptions, etc.
- Look at non-essential expenses. These are the nice to have, but not necessary things. For example, eating out, entertainment, cable television, etc. These are your latte factors. You’ll survive without them, so consider reducing these expenses.
After you go through these two steps, you’ll have to look harder. If you are not tracking your expenses and don’t have a budget, follow these steps to start a budget. You may think budgeting is unnecessary, but ask yourself why businesses keep track of their income and expenses. Believe it or not, budgeting will help you reduce your expenses and improve your finances. Here are some budgeting tools you can use:
My personal recommendation is to pay a little bit of money and try You Need A Budget (YNAB) which offers 60-day money back guarantee if you’re not satisfied.
Earn More Money
The second part of the equation is income. Besides cutting costs, companies constantly talk about how to improve their revenue. They try to improve their products and services, and introduce new ones. Likewise, you should be doing the same by thinking about ways to improve your existing income and build new income streams.
To improve your existing income, continue to build up your skills and move to a higher paying position or negotiate for a raise. Here are a few tips:
- Career Hacking: How to Get a Raise
- How To Ask For A Pay Raise
You can also add to your existing investments so that they will give you more in return. To build new income streams follow this guide on how to earn more money. If you just want some ideas to work on right away, here are a few good lists:
- 52 Ways to Make Extra Money
- 40+ Alternative Income Ideas and Resources
- 26 Ways To Make Extra Money While Keeping Your Day Job
- Multiple Income Streams: 10 Ways to Earn Extra Income
Cash Flow Is King
To sum it up, cash flow is king whether you are running a business, or managing your finances. Without positive cash flow, you cannot effectively pay down debt or build wealth. As such, your first priority in the process of trying to improve your finances is to (1) reduce your expenses, and (2) increase your income.
Published or updated October 28, 2012.