During my career as an accounting and finance leader working for healthcare companies of $50M up to $350M in annual revenue, I built many budgets from scratch. I've followed budget processes that were extremely detailed and tried to take into account every penny of cost, and I built high-level budgets that focus only on changes in the new year.
What I learned from my experience is that its more important to build a list of key changes, called assumptions, and work with your current costs + your assumptions to build your budget rather than focus on minute details that we call “immaterial” in the world of accounting & finance.
Wealthy business owners don't treat their personal finances like the traditional worker does. They treat personal finance like a business. Using this method, we can learn how to build wealth and transcend the worker mentality, and become owners of our own lives.
“One of the reasons that millionaires are economically successful is that they think differently.” ―
Thomas J. Stanley
What are Assumptions?
Assumptions are changes (or lack of changes) in your business or industry that will affect future revenues and expenses. Examples of assumptions in healthcare:
- Medicare payments will decrease in 20xx by 2%, so we will assume our revenue stream from Medicare patients will be 2% less in the following year.
- We are opening a new clinic, so we will budget for new revenue and expenses for that clinic and add them into our overall budget.
- We have equipment that will run out of warranty this year and will need a maintenance contract that will cost an extra $35,000 per year.
- Our rent expense will increase 2.5%, as stated in our lease.
As we layer in these adjustments to our business, we start to build a solid projection for the amount of profits we can generate in the following year.
Applying Assumptions to Personal Finance
Just like in business, we can apply assumptions to our personal annual budget. Will we receive an increase in salary the next year, or start generating profits from a side-hustle? Will we cancel our cable bill and save $185 per month by subscribing to Netflix instead? What other ways can we tweak our expenses or increase our revenues to improve our bottom line?
Take it one step further, and make the decision NOW what to do with profits from the business of your personal life. Treat your job like its a revenue-generating business, and manage your personal expenses like a business owner.
Make a commitment to retain your profits and move them into an interest-bearing account or brokerage account where you can use your funds to generate passive investment income, or to purchase a side business and add an additional revenue stream to your personal business.
Budget Like a Business in Your Personal Life
To use this budgeting method, you need to understand what your current revenues and expenses are. When I'm budgeting for my salary, I eliminate unnecessary complexity and use my NET PAY. Net pay is the money that actually hits your bank account net of taxes, benefits, and other deductions. Your net pay is the cash that you can use to cover expenses to run your personal life, or to retain in a non-retirement bank account or other savings method to grow your personal wealth.
In the illustration to the right, we show prior year revenue and expense, and compare it to our current year budget. This is a summarized version, and I would recommend breaking your budget out by month, or even by paycheck, to trend out your cash flow and profits.
How do you grow your net pay revenue stream? Promotions, raises, bonuses, and commissions. In short, plan to kick ass at work and squeeze every dollar out of your employer that you are worth.
Budget Like a Business to Drive Profits
Now that you have your prior year revenue and expenses in comparison to your current year budget, the next step to increasing your net income is to find ways to increase revenues and decrease expenses. Look through your expense lines and find ways to trim down. Look at your revenue lines and find ways to increase your side business, raise your salary with your current employer, or add a new income stream. If your current employer is not interested in retaining your talent with bonuses or other incentives, consider looking for other companies that may be in need of your skill set. Don't sell yourself short. Treat your career like a business and maximize your profits!