Managing the “Business” of Home?

We all know that business is very cutthroat. Competition is fierce. It’s been said that most new businesses don’t last more than 5 years before they go under. In recent times, even businesses that have beat the 5 year record are struggling. It’s not hopeless, but it is a really big challenge to remain profitable in today’s economy. The same factors that affect businesses are also affecting your home finances as well… but we’ll get to that later in this article. First, though is a refresher on something you’ve probably heard before:

The formula for profit is: (REVENUE – EXPENSES) = PROFIT.

Companies that want to increase profit can so do in two ways. They can work to increase the REVENUE or decrease their EXPENSES. Either way will work to increase profit.

But which is better?

Lets look at increasing REVENUE:
It’s HARD to increase revenue without also increasing your expenses at the same time. The old saying “It takes money to make money” applies here. Companies that want to sell products have to research and develop, create, market, advertize, and sell new products and it’s just plain expensive. They have to make sure that the NEW revenue is higher than the new costs to make a marginal profit.

Decreasing EXPENSES:
On the other hand. Cutting COSTS is another way to increase profit. The sad truth is that cutting costs usually means laying people off…but not always. Sometimes it could mean that the 401(k) match will disappear this year, other times it may mean that there’s no Christmas party. Hopefully the cost cutting measures in your company haven’t been too drastic.

Ultimately, the businesses that will succeed are the ones who can keep or increase their customer base (REVENUE) AND also reduce operating costs (EXPENSES) without sacrificing customer service.

Fortunately… I don’t manage the finances for a company. Thankfully, I need only worry about the financial entity that truly matters: My family finances. Everything I said earlier about the profit of companies still applies to your home.. but now you replace REVENUE with INCOME.

If you were to operate your family finances as if it were a business… would you say you’re making a profit? Just breaking even? Deep in the hole?

As Dave Ramsey says in his Financial Peace University Classes “If you managed a company called YOU Incorporated. Would YOU FIRE you?”

I think a lot of us would be fired right now. If you’re not “making” a profit at the end of each month and you don’t have any cash reserves left then it’s time to make some hard decisions.

So what do you do? Do you increase INCOME or do you decrease EXPENSES?

I’m a fan of the latter and here’s why: One of the side effects of getting a higher paying job is that the family expects to have an increase in their standard of living. A person might say to themselves, “I used to have a $40,000 a year job and now I have an $80,000 a year job… let’s get a bigger house!” It’s okay to want bigger and better things.. but most people don’t plan ahead and actually run the numbers. I can say that because I’ve done that myself! A person who just received a $300 a month raise will often “reward” themselves by getting a new car with $400 a month car payment! Now I ask you.. how smart is that and how long will it take for that plan to backfire? This sort of thing happens every day. People spend more than they make easily with credit cards and increasing debt.

Now lets look at going the other route, cutting expenses:

Once you cut an expense… it’s GONE! Unless you go out and get another monthly expenditure you have just increased your monthly bottom line. For example.. A couple goes over their cell phone bill and realized that they’re spending over $400 for the whole family each month. Suddenly, paying $99 per phone for 2 twin 8 year old girls doesn’t seem like such a great idea. So they take away the cellphones and cut the bill in half. C’mon.. do 8 year olds REALLY NEED a cellphone?

Another couple might start making small changes all around the house. They start conserving electricity by turning down the temperature on the hot water heater, then turn off lights more often and put the TV’s on powerstrips and turn them off at night. Then they call up auto insurances companies because they can get the same coverage for less with another company. They start eating out a little less and drop themselves down to basic cable TV. All of the changes add up to a bigger bottom line.

I can’t say what changes that you need to make for your family…but I can say that if you’re struggling right now, look to cutting costs first, rather than trying to find ways to increase income. Once you have cut the costs enough… you can pay off the debt you accumulated or begin saving that emergency fund that you desperately need. After you have yourself a solid financial foundation again and are moving in a direction that is increasing your net worth, then start looking to increase income if you still want to do that. Cutting costs down to the bone doesn’t mean you’re poor, broke, or downtrodden. It makes you smart!

How is your “Business” being managed? Feel free to leave a comment below!