Doing the income statements and asset and liabilities accounts

As detailed in my previous posts, it was recommended to me by various books to complete an income / expense sheet and an asset and liability sheet. I have done one for my personal finances and one for the business.

Personal Accounts

I have now gone through all my expenses and made a budget that I am going to try to keep to each month. I have broken this down into different types of expenses and have built a spreadsheet to record how much I actually spend next to the budget.  

I have added up how much cash I have in the bank and have put aside exactly 6 months of cash that would be required to live if I did not have any income. I am going to leave this aside as easy to get to cash so that if for some reason my income stops, I always have this for emergencies and to pay the bills. (I generated this cash by saving the money from working in my business over the last few years).

That leaves a small amount left over of personal cash to invest.

Business Accounts

I have done the same thing for the business accounts; I have gone through all the business expenses and have created a budget based upon the last two years of expenses. I will try to keep the business expenditure for fixed costs within this budget.

I have worked out the wages and the optimal dividend amounts to make sure my personal expenses are covered in the payments the company will make to me. This is how much my business asset will need to generate to cover my expenses.

I recently read an excellent book called ‘The richest man in Babylon’ by George S Clason. In the book he recommends saving at least 10% of your pay check every month. This 10% is put aside to use as investment. This should be used as personal investment for long, or very long investments for the long term security plan.

I have therefore added 10% onto the total amount of money I would like to take from the company each month. I will invest this 10% personally.

Any money left over, I will invest through the business, to buy any other assets or income generating investments.

Summary

The overall idea is this:

Business income -Business Expenses – Tax = Total Business cash flow

If total business cash flow is greater than personal expenses you are financially free

 

Next steps

The spreadsheets will hopefully allow me to keep a check on both business and personal expenses. I will then focus on increasing the value of the company and its ability to generate revenue (Cash flow)

I only intend to take out of the cash from the business that will cover my personal expenses + 10% for investment. I can then invest the rest of the money back into the business or other assets.

Note

An excellent way to learn about Income / Expenses and Asset and Liability sheets is to play the CashFlow101 board game. You can buy this from the Rich Dad, Poor Dad website.