Money Management – What You Need to Know
Are you managing your money or just accounting for it? You should know that they are not the same thing. According to the dictionary, the definition of accounting is simply, “the action or process of keeping financial accounts.”
You can keep financial accounts, without managing them. A bookkeeper simply keeps track of revenue, the money coming in, and expenditures, that is, the money that goes out. For accounting purposes, it doesn’t matter if a lot is coming in or a little. It doesn’t matter if you’re spending all your money, saving it, investing it, or just throwing it out a window.
As long as you know how much is being thrown out the window, and that amount is being recorded and tracked, it is being accounted for.
Basically, your bookkeeper that handles your accounting for you just compiles the data and reports that data back to you. Your accountant will ensure that all transactions are recorded properly in the right accounts. Rather than recording everything together under an account named “miscellaneous,” a good accountant or bookkeeper separates the data into different categories, or accounts, so your spending from the various accounts can be analyzed.
If you don’t like math and numbers, it is not a problem. That’s why you hire an accountant or bookkeeper! On the other hand, you must still act as a money manager, and evaluate the reports the accountant produces and determine if you can still pay for your internet service after you purchase new office furniture. If you can’t, as a good money manager, you will continue use the chair with the squeaky wheel another month or two and buy new furniture when you have accumulated enough money to pay for it.
Money management is the process of saving, investing, spending or otherwise overseeing cash usage. If you are managing your money, you are not just accounting for the money you’re spending, you are making decisions about the best way to spend the money. A managed account implies decisions about purchases, investments, and savings. When you manage your money, you have savings set aside for emergencies and retirement. You move funds out of under-performing investments and place them into financial vehicles that give a good rate of return.
As a money manager, you evaluate your spending habits to ensure they are aligned with your vision and mission. This helps you set financial goals to expand your influence and accomplish your goals. Money managers understand that making money is not the primary goal. Money is the result of careful planning and consistent execution. Money, in business, is what happens when you do the right thing for the right reasons over a long period of time.
The whole point behind accounting is to know the truth about what you're doing, where you're going, and how to get there. Accountants help you create action plans to get where you want to go. However, your action plan has to be based on your personal money management style.
Unless you have a healthy mindset toward money, your financial world won’t be pretty. You will be sucked in by the pitchmen who promise fast, easy wealth if you buy their product. You will be enticed to chase the newest shiny object and latest technological gizmo. Your available money will seep through your fingers even when you try to tighten your grasp.
Without a healthy money mindset, either you won’t have a plan for spending or you will ignore it. A sound money management style guides your spending. You will know what to do with the money you haven’t even earned yet. Until you apply who you are to the financial information you've collected, it is really just a bunch of numbers on the page. It is like a hazy black and white photograph depicting a pile of numbers, a lot of debt, a surplus of cash, or a liability.
This picture looks different for everyone. Though they’re working with the same sets of numbers, and have the same financial hours in a day to create, there is a difference. Each individual creates his own financial world using the skills, education, and experiences stored in his mind.
The numbers that make their way onto the page are there because of the decisions you made which created the debt, the income, the tax liability, or the surplus. These exist because your mind and actions created them. Only you can drive the changes you want to happen in your business. If you don’t like what your accountant shows you, you must be aware that you made it that way.
In today’s marketplace, it is not uncommon to hear e-commerce entrepreneurs and online marketers boast of six, or even seven, figure incomes. However, unless that revenue is managed well and the proper financial mindset is applied, what they actually keep in the bank will be far less. You can only make a million dollars if you manage a million dollars well. Not all seven-figure earners make a profit.
The Bottom Line
Wealth is not created from revenue alone. Wealth is created by your financial mindset and the ability to manage your money well.
Have you ever wondered about the income claims online entrepreneurs have made? How do you feel about those who boast about making seven figures and beyond? Does knowing that some of them may not even make a profit cause you to view it differently? Share your thoughts in the comments below!
Get the full scoop on money management services with The Bottom Line CPA.