Companies have many important responsibilities. They need to provide quality products and services to their customers, answer to their investors, pay expenses and payroll, and work toward becoming profitable while managing their cash flow effectively in order to stay afloat.
If you are struggling to keep your family on budget, then you might find success if you de-personalize the finances and instead take on the roles of shareholders and business owners, and take a corporate approach to your personal financial plan. When you do this, you evaluate your family's financial situation in a similar way to that of an investor evaluating the companies they want to invest in, and you manage it with an eye toward smart spending and profitability. You and your family (the other shareholders) then evaluate how good a risk your family's financial situation is and attempt to get it moving in the right direction. (To learn more on how you can improve your budgeting, check out The Beauty Of Budgeting.)
TUTORIAL: Budgeting Basics
The Advantages of Expenses
In business, expenses are the costs that must be incurred in order for a company to make money. Investors use expenses to help gauge a company's management efficiency and financial health. Companies know this and they are careful about creating expenses, making sure that they somehow work to enhance their value or profitability. You can do the same when making purchase decisions for your family. Judge each potential expense by how much it helps grow or preserve your family's assets and for recurring expenses (like electricity) make sure your family's home is running efficiently and that you are paying the lowest bills possible.
Companies also use their expenses to help defray some of their taxes, and so can you. Before making any big ticket purchases or home repairs, look into the tax deductions that you can get for certain items, like fuel efficient vehicles, and make purchases that allow you to take advantage of them.
Your Savings Are Your Retained Earnings
While companies have debts and expenses, they don't necessarily pay out every dime of their net earnings each year. Those earnings kept by the company and carried over for future use are called retained earnings. You can consider your savings your retained earnings. While a company might reinvest those earnings into research and development, your goal is to hang onto them in the form of retirement and emergency savings. (For ways to help your savings grow, read Turn Small Savings Into A Big Nest Egg.)
Evaluate Your Debt Ratio
One way that investors can judge the health of a company and decide whether or not to invest in it, is to take a look at its debt ratio, a measure of debts against assets. The more debt a company has, the bigger a risk it is, and the less attractive it is as an investment. To see how attractive your "company" is, divide your debts by your assets. A number of less than one means you have more assets than debt, and a number of one or more means that you have more debt. The higher your number, the riskier your company.
Issue Quarterly Reports
Companies must confront their financial situations openly and honestly every quarter when they issue reports to investors. These reports can give an indication of potential problems within the financial management of the company or show how well the management is doing. You can do the same by preparing a report for your household that contains financial statements, a discussion of the important events that you've encountered as a family which have affected your financial results (include both positive and negative events) and a discussion of how you plan to deal with these changes. By forcing yourself to confront your financial successes and failures in such an honest and thorough way, you can help keep your family on track toward profitability.
Vote on Dividends
If you are comfortable with the performance of your family's finances, you and the other shareholders (i.e. family members) can vote to distribute a quarterly or annual dividend that can be used for fun purchases. The thought of a dividend can go far in keeping your family members on board with spending cuts, and it also serves as a great reward for hard work.
The Bottom Line
Discipline is one of the most important traits you can bring to the table when you work on your family's financial plan. If you find that you, and others in your family, have trouble sticking to a plan and reaching your modest financial goals, it may be time to switch gears and try something new. The de-personalization, accountability and objectivity offered by a corporate approach to personal finance could be just what you and your family need. (For other suggestions, check out Run Your Budget Like A Business.)