Understanding Financial Concepts is Key to Building Your Wealth - Part 2
People who know me know I ask a lot of questions. As a journalist, this is a big part of the job. As a business and financial coach, it is essential to be completely informed prior to initiating a plan and devising the strategy to create a strong foundation on which my client's personal and business structures will stand.
One of the first questions I always ask entrepreneurs is, “Why did you start your own business?”
The answers range from “for the independence,” “to be my own boss,” “to make my own decisions,” to “because my boss didn't know what he/she was doing, and I want to run my business the right way.”
When I ask what their goal is as far as income, the response is “financial gain,” “pay off debt,” being “in the black,” “early retirement,” “the freedom to travel,” “generate an income where money is no object.”
Yet when I ask what their plan is, for “the right way” to attain their financial goals, I get the blank stare, shoulder shrugs, and, my favorite, “Am I supposed to have a financial plan, too?”
Why do you need a financial plan?
Like your business plan, your financial plan (personal and business) is your guide to knowing what you have (and don't have), knowing what you need, knowing how to get what you need, and knowing how to grow and keep it once you have it.
Having a financial plan in place is necessary at all stages of your personal financial stability and your company's growth and sustainability as well.
Your financials make up nearly half of your business plan and like your business plan, should be followed, referred to often, and adjusted as needed to keep you on track as internal and external influences change. The loss of big account, incapacitation, landing a new client, your business expansion, all affect your personal and business financial needs as a small business owner.
Your Financial Needs Analysis
Being and staying financially fit is all about the choices you make. The first step in financial planning is conducting a financial needs analysis (FNA) of your current status. The FNA is a tool to identify your financial needs so an effective financial strategy can be developed.
Do you know the distinction between a “need” and a “want?” A “want” is something not essential to your life to survival.
A “need” is something you must have to live such as shelter, food, and clothing. That new pair of Manolos or that Breitling Navitimer are “wants.” They may be essential to your wardrobe, but not to your basic needs to survive.
Your Current Financial Fitness
Determine what your costs are now to fulfill all of your personal needs. Include what you pay for rent or mortgage, installment payments (car loans, student loans, credit card payments), insurance (auto, health, life), medical costs, food, clothing, gas, utilities, maintenance (house, auto), school expenses, all other expenses.
Next list your current income from salary or wages, commission, monetary gifts, interest on savings, accessible cash accumulated on your universal indexed life insurance, annuities, your ebay store, and all other income.
To determine your current financial status, subtract your total expenses from your total income. How does your personal “bottom line” look?
Preparing a personal financial needs analysis illustrates exactly where you need to make adjustments. “Breaking even” is not being financially fit. This means you are living on the edge and maybe from client payment to client payment. This also means should an emergency arise such as an appliance breaks, there is a fire that causes major damage, you get sick and there is no one to cover you in your business, your transmission goes out and you cannot get supplies to fulfill your orders, then your financial plan needs to be adjusted right away.
Perhaps you need to curb your spending. If you are only spending what is necessary for you to live already and you are in the negative, then your income needs to be drastically increased.
