This week I’m excited to start talking about the efficient use of capital. The efficient use of money is a topic that I think gets far too little lip service in everyday conversation.
How you use your money is a direct reflection of either your mission, vision, or values.
I want to begin by discussing a few tools that can be used to measure the efficient use of money. On some level everyone has a SMART goal related to using money more efficiently. The Specifics, Achievability, Relevance and Time bounds of the SMART goals vary slightly for every person, but Measurement is the same. Therefore, I want to focus on a couple of tools used for money and the “M” of the SMART goal, Measurement.
- The first tool is called an income statement.
An income statement is a measure of all the money you earned in a certain amount of time subtracted by all the money you spent over that same time period.
Prepared and reviewing an income statement has two primary effects:
- Makes you aware of all the places you are earning money as well as spending money.
Being aware of where you are spending money can quickly alert you to spending that is not in alignment with your values. Being aware can also help you identify opportunities for improvement.
- Tells you if you are making a profit or going further into debt.
Earning more than you are spending means you are making a profit. Spending more than you are earning means you are digging yourself a hole. I will let you figure out which one is better.
- The second tool is called a balance sheet.
A balance sheet is a measure of how much you are worth at a certain point in time. It is calculated by adding up the value of everything you own, these are called your assets, and then subtracting the amount of money you owe, these are called your liabilities. The difference between these two numbers is how much you are worth, called your net worth. In accounting terms, it is also called owner’s equity.
The income statement and balance sheet are two financial documents that help us measure the current state of our finances (money) as well as help measure any future improvement. I have been creating a personal monthly income statement and balance sheet for almost a decade now. I find them extremely helpful with understanding where my money is and where it is going.
Do you have questions about how to get started with using or creating these tools? Do you use them in your personal or business life? Let me know in the comments and if you haven’t already subscribed please do so over on the right.