As a business owner, you might be focused on the financial health of your enterprise, but don’t overlook the importance of your personal finances. Understanding and maintaining your personal financial health is not only essential for securing a bank loan but also for making informed business decisions and understanding your value as an individual. Why is this knowledge crucial and how can it benefit your business?
The Basics of a Personal Financial Statement
What Is A Personal Financial Statement (PFS)?
The PFS calculates the total net worth of an individual, couple, or household and provides a comprehensive overview of all assets, liabilities, and sources of income.
The document outlines your assets (what you own) and liabilities (what you owe) and income (what you earn).
Purpose: It shows your net worth at any point in time. By knowing your net worth, the PFS is a tool to help set and monitor personal financial goals.
A word of caution: a PFS should not be confused with a personal or household budget. A PFS helps you understand your monetary value at any point in time but it does not help monthly household or personal budgeting. Read our blog for budget topics separately!
Why Personal Financial Statements Matter for Your Business
1. Securing Bank Loans
Lenders need to assess your financial stability before approving a loan. Personal financial statements play a critical role in this evaluation. They provide a clear picture of your financial health, showing your ability to manage debt and repay loans.
Key Points:
• Transparency: Detailed financial statements show lenders that you are financially responsible.
• Collateral: Assets listed on your balance sheet can serve as collateral for securing loans.
• Debt Management: A clear understanding of your liabilities helps demonstrate your capacity to handle additional debt.
2. Making Informed Business Decisions
Understanding your personal financial health allows you to make better business decisions. It provides insight into how much risk you can afford to take and helps you plan for future investments.
Key Points:
• Risk Assessment: Knowing your personal financial standing helps you gauge how much risk your business can handle.
• Investment Planning: It empowers you with knowledge to make informed decisions on whether to reinvest net profit back into your business for growth or to distribute cash from net income to meet a personal financial goal.
• Financial Flexibility: Strong personal finances provide a safety net, allowing you to make bold business moves without jeopardizing your personal financial security.
3. Enhancing Business Partnerships
Transparency in your personal finances can build trust with significant business partners and investors. It shows that you are responsible and reliable, making you a more attractive partner.
Key Points:
• Credibility: A well-maintained personal financial statement enhances your credibility.
• Trust: Financial transparency fosters trust with partners and investors.
• Alignment: It ensures that your personal financial goals align with your business objectives, creating a cohesive strategy.
How to Create and Maintain Personal Financial Statements
Step 1: List Your Assets
Start by listing all your assets, which might include:
- Cash and savings accounts
- Investments (retirement, stocks, bonds, mutual funds)
- Business Valuation
- Real estate
- Personal property (vehicles, jewelry, art, collectibles)
Step 2: List Your Liabilities
Next, list your liabilities, such as:
- Mortgages
- Car loans
- Student loans
- Credit card debt
- Other personal loans
Step 3: Calculate Your Net Worth
Subtract your total liabilities from your total assets to determine your net worth. This figure provides a snapshot of your financial health.
Step 4: Track Your Income and Expenses
Track income sources to understand the types of income you earn over a specific period of time. This should include:
- Salary and wages (W2)
- Other working income (Form 1099)
- Dividends and interest
- Rental income
- Business income
- Other income (child support, alimony, etc)
Understanding the types of income you earn (whether W2 or other) will further your personal knowledge of your financial picture. Discuss the income sources with your CPA to understand if changes should be made to maximize tax benefits and banking resources.
Benefits of Understanding Your Personal Financial Statement
1. Better Financial Planning
Knowing your financial position helps you plan effectively for both personal and business goals. It ensures that your financial strategies are aligned with your overall objectives.
2. Improved Financial Health
Regularly reviewing and updating your personal financial statements helps you stay on top of your finances, identify potential issues early, and make necessary adjustments.
3. Increased Financial Literacy
Understanding the components and significance of personal financial statements enhances your overall financial literacy. This knowledge empowers you to make informed decisions and manage your finances more effectively.
Conclusion
Understanding and maintaining your personal financial statement is crucial for the health and success of your business. By keeping a clear and accurate record of your finances, you enhance your credibility, make better investment decisions, and ensure long-term financial stability. Remember, your personal financial health directly impacts your ability to grow and sustain your business. Leave your financial fears in your past and empower yourself with knowledge. Take charge of finances and empower business success with us Today. Schedule a call with our team to learn more.