Anyone running a successful business knows that to be able to assess past financial performance and predict future performance, it’s essential to keep financial statements. But surprisingly, not a lot of people do the same with their personal finances.
With this in mind, the key information business owners need to know can be as follows:
- How well did the business perform for a given period?
- Where does the business stand financially at a given period?
- How well placed is the business for the future?
All of these questions are also crucial for personal investors, and all can be answered by having a look at your household’s financial statements.
So what do we mean when we talk about “financial statements”? They’re not just your bank account statements and other bills, but complete written records that show the activities and performance of your finances. There are three main types of financial statements:
- Balance sheet. In general, it provides an overview of your assets, liabilities and equity at a given point in time, usually balanced at the end of a financial year.
- Income statement (profit and loss statement). In general, it provides an overview of any revenues, expenses and net income over a given range of time (e.g. 1 July 2017 to 30 June 2018).
- Cash flow statement. In general, it provides an overview of what your cash is being spent on. Some categories on this statement might be groceries, medical expenses, travel, etc.
Personal financial statements
Getting a handle on the past, present and potential future financial performance of your household finances through the use of your very own ‘personal financial statements’ can be beneficial. Importantly, applying these types of financial statements to your household doesn’t have to be complicated. Some banks will provide a detailed breakdown of your cashflow via internet banking, or we have an easy to use spending analysis spreadsheet that you’re welcome to try out (contact us for a copy of this!)
Thinking of your household as a business can be an interesting thought, but it’s important to note that running a successful, long-term household also requires proper, ongoing management accounting.
Consider the following above mentioned questions, but now in the context of your household:
- How well did your household perform for a given period?
- Where does your household stand financially at a given period?
- How well placed is your household for the future?
In a nutshell, personal financial statements can provide perspective regarding where you were, where you are now, and where you are headed. This is especially pertinent in terms of whether you are on track to achieve your financial goals and objectives, and if adjustments need to be made moving forward.
After reading this article, you may also like to read watch a quick video we made about getting on top of your cash flow to help inrease.endence with regards to wealth accumulation and cash flow generation.
If you have any questions regarding this article, please do not hesitate to contact us.