Financial Foundations, Part 6 – How to Manage Finances

22 August 2015 Categories: Dollars & Sense

This is the sixth installment in a series on the foundations of finance. If you haven’t already, I suggest that you start with the first post at this link.

I started off this series by looking at profit and cash—making and keeping money—from a high level, and now we’re contemplating how we manage.  The last installment was on managing the business to make money.  Now let’s look at financial management.

I see managing finances as two parts: managing our money, and managing our platform.  The money management is the investment decision: how to we use what we have to get more?  The platform management is the system decision: how do we create systems and processes to track our money?  And the more important of these two, of course, is to actually make money.  What good does it to a business owner if they build the perfect system but lose their own business?  So the investment question comes first, and this post will cover just the investment.

We can break down the investment question in to two parts: how to make the investment, and how to manage the proceeds.

The first part is figuring out how to invest.  To do this, we start off by considering what our options are—what we can sell or what we can do, estimate out what will give us the most money back for the time and money we put up to develop them, then actually execute on our top option, get paid by our customers, evaluate how we did, and then get ready for the next round.

Assuming this cycle is successful, we’ll have gained cash and have put it in the bank.  So the second part of managing money is that we want to manage this cash.  Money buys a lot freedom and options, and if we have too little, then we don’t have enough options.  However, letting it sit around and do nothing isn’t necessarily good either.  So we ultimately want to have a savings account that is large enough to give us a decent level of comfort and options, but once we reach that point, then look in to how we can use additional income to reinvest in the business.

By the way, it really is like the stock market: investors look at the stocks, figure out which they can buy that will give them more money after a period of time, then they sell the stock, have some cash, and figure out what the next thing is that they can invest in. 

So the mindset that I really want to leave here is that all of our business activities are about investment: uncovering and evaluating options, acting on the one with the highest reward, reaping the benefits, and repeating to build the bank account.

In the next post, we’ll discuss the platform, systems, and tools that we can use to make this job easier.