For effective financial management of the company and also for effective management of personal finances, we have to have our costs under full control. More important than how much money we earn, is, what we do with the money after we have earned it. We can put it on our saving account, invest or increase our life standard.
It is no different in entrepreneurship. When a company enters the growth phase and the first successes are showing, normally the result is a positive account balance. Many entrepreneurs are then in a great temptation, weather to invest back in to business, or raise their own life standard instead.
The essential word in all this is growth. With growth we often encounter an effect similar to that of making a snowball. It is becoming easier every day, from moment to moment, and the ball is growing and growing (the rich become even richer; and when we have a viable business it is no problem at all to build a second, third...). To truly understand this, we have to possess a long-term vision. Only people with long-term visions are investing in company's growth. We can invest only into three areas that are connected or linked to a "real growth".
The first area where we can invest is our own business and this investment is therefore connected to the growth and development of our company. Another area where we can invest is financial investments, so that money starts to work for us. Third, the last area where we can invest is ourselves - knowledge, skills, relationship, etc. And investing in knowledge usually brings the greatest benefits.
Everything else can't be considered as investing in growth. But instead it represents our spending and our life style. With "real growth" we deliberately reduce our present spending and invest in our future so that we can spend more later, when we are older. But to be able to spend more in the future, we need to control over current expenditure effectively. The basic formula for creating wealth is to not spend more than we earn.
The first logical step for taking control over our spending is through analysis, so that we can determine where our money is going. For effective cost analysis it is necessary to monitor our expenditures for certain time period, where does our money go, on what and how much do we spend. Financial experts recommend that for at least one month we should record our expenses and those data then should represent our basis for further analysis.
We can monitor our costs or expenditures in two simple ways. The first is that we collect bills for the entire period and then at the end put them all into spread sheet. In the case that we are disciplined enough, we can keep the record of each transaction and put it down on a sheet of paper, PDA or computer.
The biggest problem for keeping track of our expenditures is that it requires discipline and is psychologically very difficult, although on the other hand technically very simple. It is something people who are thinking of incorporating a business will have to do anyway. But being realistic, I think that there are not many people in the world who simply enjoy tracking and recording each and every transaction they make. However, it can be of great benefit to us in the long run.
It is no different in entrepreneurship. When a company enters the growth phase and the first successes are showing, normally the result is a positive account balance. Many entrepreneurs are then in a great temptation, weather to invest back in to business, or raise their own life standard instead.
The essential word in all this is growth. With growth we often encounter an effect similar to that of making a snowball. It is becoming easier every day, from moment to moment, and the ball is growing and growing (the rich become even richer; and when we have a viable business it is no problem at all to build a second, third...). To truly understand this, we have to possess a long-term vision. Only people with long-term visions are investing in company's growth. We can invest only into three areas that are connected or linked to a "real growth".
The first area where we can invest is our own business and this investment is therefore connected to the growth and development of our company. Another area where we can invest is financial investments, so that money starts to work for us. Third, the last area where we can invest is ourselves - knowledge, skills, relationship, etc. And investing in knowledge usually brings the greatest benefits.
Everything else can't be considered as investing in growth. But instead it represents our spending and our life style. With "real growth" we deliberately reduce our present spending and invest in our future so that we can spend more later, when we are older. But to be able to spend more in the future, we need to control over current expenditure effectively. The basic formula for creating wealth is to not spend more than we earn.
The first logical step for taking control over our spending is through analysis, so that we can determine where our money is going. For effective cost analysis it is necessary to monitor our expenditures for certain time period, where does our money go, on what and how much do we spend. Financial experts recommend that for at least one month we should record our expenses and those data then should represent our basis for further analysis.
We can monitor our costs or expenditures in two simple ways. The first is that we collect bills for the entire period and then at the end put them all into spread sheet. In the case that we are disciplined enough, we can keep the record of each transaction and put it down on a sheet of paper, PDA or computer.
The biggest problem for keeping track of our expenditures is that it requires discipline and is psychologically very difficult, although on the other hand technically very simple. It is something people who are thinking of incorporating a business will have to do anyway. But being realistic, I think that there are not many people in the world who simply enjoy tracking and recording each and every transaction they make. However, it can be of great benefit to us in the long run.
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