3 Primary Goals Of Business
3 Primary Goals Of Business
3 Primary Goals Of Business - How are you doing financially? You should ask yourself this question every time and it should definitely be your starting point when you decide to start a more or less formal financial plan. The first step to solving this question is to collect and analyze your records
) is the difference between your assets and your liabilities. So the formula for determining net worth is:
3 Primary Goals Of Business
3 Primary Goals Of Business
. To determine whether your net worth is on the plus or minus side, you can prepare a personal net worth statement like the one in Figure 14.6 “Net Worth Statement,” which we created for a fictional college student named Joe. (Note that we included lines for items related to some people's net worth statements, but left them blank when they didn't apply to Joe.)
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Note that we are careful to calculate Joe's assets in terms of their fair market value—not the price he could get by selling them now, the price he paid for them, or the price he could get for them in the future.
Finally, notice that Joe has a positive net worth. At this point in the average college student's life, a positive net worth may be a bit unusual. If you currently have a negative net worth, you technically are
, but remember that the main goal of getting a college degree is to enter the workforce with the best possible chance of generating enough wealth to reverse the situation.
. This is the function of the cash flow or income statement, which shows where your money came from and where it should go.
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-income) is drawn from two sources: student loans and income from a part-time job. Its costs (cash
-outgoing money) falls into several categories: housing, food, transportation, personal and health care, entertainment/leisure, education, insurance, savings, and other expenses. To learn about Joe
Joe was able to maintain a positive cash flow for the year ending August 31, 2012, but he reduced it. Plus, he's only in the black because of the flow of student loans—income, as you'll recall from his net worth statement, is also a non-current liability. Still, we're willing to give Joe the benefit of the doubt: Even though he's incurring high costs for education, he's committed to debt because he considers education (and, we say, prudent spending) an investment that will pay off in the future. .
3 Primary Goals Of Business
When preparing a cash flow statement, you should only record income and expenses for a month, semester or (in Joe's case) a specific period. Remember that you need to identify both inflows and outflows
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: You record income only when you receive money and record expenses only when you pay money. For example, when Joe used his credit card to buy his computer, he didn't actually pay. However, each monthly payment on her credit card balance should be recorded on her cash flow statement (by type of expense—say, entertainment/entertainment, food, transportation, and so on).
, this is because you spend more than you earn. Ultimately, your net worth and cash flow statements are most valuable when you use them together. Your net worth statement tells you what you're worth—how much wealth you have—and your cash flow statement tells you exactly how your spending and saving habits are affecting your wealth.
We know from Joe's cash flow statement that despite his limited income, he can save $1,200 a year. He knows that it makes sense to reserve some cash for emergencies (car repairs, medical needs, etc.), but he knows that setting aside a portion of his money (perhaps every week) is important. He is developing a habit that he needs if he hopes to reach his long-term financial goals.
What are Joe's goals? We summarize them in Figure 14.8 “Joe's Goals,” where, as you can see, we divide them into three time frames: short-term (less than two years), intermediate-term (two to five years), and long-term (five over a year). Although Joe is still in the early stages of his financial life cycle, he has identified and formulated his goals very effectively. Specifically, they satisfy four criteria of well-defined goals: ie
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They are also intelligent. Joe sees no reason, for example, why he can't pay off his car loan, credit card, and charge account balances in two years. With no income other than student-loan money and wages from a part-time job, Joe decides (rightly or wrongly) to use his credit card to pay for his personal consumption (furniture, electronics equipment, and so on). further). Paying off this balance is no easy task, so we'll give him some credit for considering it important enough to pay off his short-term goals. He takes a month off after completing college. It may not be the best job financially, but he knows it's his only chance to travel widely. He is realistic about paying off student loans and buying a home. But he may want to reconsider his decision to classify saving for his retirement as a long-term goal. We believe this should start as soon as he starts working full time.
Once he reviews his statement of cash flows, John has a better idea of how much cash flowed in during the year ended August 31, 2012, and a better idea of where it went when it went out. Now he can ask himself whether he is satisfied with his annual inflows (income) and outflows (expenses). If he's anything like most people, he wants to make some changes—perhaps to increase his income, decrease his expenses, or, if possible, both. The first step in making these changes is creating a personal budget—a document that outlines your sources of income and expenses for the coming year, along with the amount of money for each.
Revising his figures accordingly, he prepared the budget for the year ending August 31, 2013 in Figure 14.9 “Jose's Budget”. First look at the column titled “Budget”. If things go according to plan, Joe expects to have a cash surplus of $1,600 by the end of the year—enough to pay off his credit card debt and leave him with an extra $400.
Now we can examine the remaining two columns of Joe's budget. Throughout the year, Joe tracks his actual income and actual expenses and enters the amounts in the column labeled "Actual." But like most reasonable people, Joe didn't really expect his actual figures to match his budget figures. So whenever there is a difference between the amount in his "Budget" column and the corresponding amount in his "Actual" column, Joe enters the difference as a plus or minus. Two types of variances appear in Joe's budget:
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Before we leave the topic of the financial-planning process, let's return to the topic of Joe's goals. Figure 14.8 Another look at “Joe's Goals” reminds us that, at this point in his financial life cycle, Joe has set very simple goals. For example, we know that Joe wants to buy a house, but when does he want to make this big financial move? And of course, Joe wants to retire, but what kind of lifestyle does he want in retirement? Like most people, does he expect a retirement lifestyle that is comparable to his peak earning years? Can he afford both a comfortable retirement and the cost of sending his children to college? As Joe and his finances mature, he may need to articulate these goals (and others) in more concrete terms.
Let's fast forward a decade or so, when phases 2 and 3 of Joe's financial life cycle are clearly in focus. If he has not already done so, Joe is now ready to identify all of his other goals and identify a primary goal to guide him in reaching them (Winger & Frasca, 2003). Since Joe's investment in a college education has paid off as much as he thought ten years ago, he is in a position to aim for the primary goal of financial independence—assuming he has a financially secure life, not just for himself. Even her children. Now he set this up
Level of goals, Joe is now ready to make specific plans to reach them. As we have already seen, Joe understands that plans are more likely to work when focused on specific goals. His next step, therefore, is to decide what goals he should focus on at this next level of planning.
Joe already knows what these goals are because he sets the right goals every time
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