by Gerardo A. Canales
Businesses should be managed like your own household; I’ve heard some old timers say. NO WAY! It’s always my first reaction. Households get into debt easier than businesses and they could overspend for long periods of time without any drastic action. Instead, we could run our households like a business, where almost everything has a profit justification.
First, let’s think of our household like our own business; we have revenues, costs and expenses, whatever is left is your profit. Oh! You are right, I forgot tío Sam; then, whatever is left after Uncle Sam is the profit. A business has sales and we have our jobs and benefits, so our skill is the service we sell. Improve it constantly and your sales are going to go up.
Next, businesses have cost of sales and we have the costs related to work like transportation, clothing, seminars, training and whatever we need to go to work. Ladies, brand designer stuff is not always needed; it is wanted. General expenses are like your living costs, rent, food, utilities, leisure, hobbies and more. Here’s a big difference: a household without savings is like a company without profits, but the household continues to have income and even take loans, while the company goes under.
Typically, businesses borrow money because they will use that money to make more money; conversely, households borrow money knowing that their income is not going to increase. With the exception of those who borrow money to buy food; we borrow money to buy stuff that makes us feel good because we are not used to defer gratification. We want it and we buy it. In this area the differences are substantial too: banks loan money to businesses only until they are certain the business can make enough money to repay them. Credit cards lend us money until they are certain we can’t repay; then, they just reel us in forever. Maybe if we were forced to make profits every month we would think twice before getting the latest technology gadget.
Business debt requires collateral, so businesses use their assets to guarantee the loans. If they do not have assets they get investors to fund them in exchange for equity. This process ensures a healthy balance between debt and equity. Households can’t do that because we don’t have investors in our lives; by the same token, we are not forced to have a debt-to-equity balance. We can go a lifetime without equity and without collateral like properties, savings and investments. If we have no collateral, we pay higher interest rates on our loans.
How do we make a profit? It’s the most important question in every business and it should be the most important question in every household too. In a business, as in a household, there are only two variables: Revenue and Expense. Increase one and reduce the other.
To learn more about Gerardo, visit The Business Right Hand.
Disclaimer: The views and opinions expressed in this article are solely those of
the author and should not be understood to be shared by Being Latino, Inc.