Most clients have jobs. Some might be retired, but if they have money to invest, they are earning it somehow. Some clients might be professionals like doctors, but most work for a corporation or own their own business. Many common business practices they see every day at work could easily be applied to their own personal finances. Sadly, few make the transition. This is another area where financial advisors can add value.
1. Comparing budgeted vs. actual revenue and expenses. This is an activity every manager involved in spending company funds will recognize. You have an assigned budget at the start of the year. You also have revenue (sales) goals. In the corporate world, straying from either has dangerous consequences.
Personal finances: Establish a household budget. What are your fixed, overhead expenses? These are the ones in business to keep the lights on. How much are you allocating in other categories like groceries? Track your spending.
2. Setting aside money for upcoming capital projects. When a business has a potential legal liability, they set money aside. If a drug company is planning for future products, they assign money to Research & Development. When a retail business is planning on adding new stores, they know where the money will come from.
Personal finances: Deciding you want to install a swimming pool, add a conservatory, buy a vacation house or remodel the kitchen should not be a spontaneous decision. Start setting aside money in advance. Your client is likely doing this for their children’s college education.
3. Maintain a line of credit for emergencies. In business, revenue is often cyclical. The landscaper who mows grass in the summer plows snow in the winter. Both are revenue streams. What happens during a mild winter when there is no snow? The business still has bills to pay. You need the ability to borrow cash to supplement cash flow in the near term.
Personal finances: Spending everything you earn is called living paycheck to paycheck. You are not saving and might not have an emergency fund. If that is the case, you need the ability to access cash in an emergency, like getting laid off from work. A Home Equity Line of Credit (HELOC) can help.
4. Do not put off periodic maintenance. In business, computer equipment gets upgraded periodically. There is a service contact on the copy machines. The office gets cleaned at night.
Personal finances: It can be tempting to skip periodic maintenance when it appears there is not a problem to be solved. Skipping maintaining your roof or repainting the exterior of your house might seem like a cost saving, but once the leaking starts, the problems get bigger and more expensive to fix. Your house might be your largest single asset. Maintain it.
5. Refinancing debt when interest rates decline. Companies and cities refinance their long term bonds when they can lock in lower interest rates. That is why call protection is important for investors.
Personal finance: Homeowners have debts too. Their mortgage might be the biggest one. Credit card debt can add up quickly. Periodically shop around for lower rates. Calculate the cost of switching. If it makes sense, do it.
6. Annually renewing supplier contracts. Companies buy lots of stuff. This includes overnight mail, phone service, electricity, office cleaning and plenty of other services. Although a company might choose to stay with a reliable supplier, they often put out Requests for Proposals (RFPs) for the service when the current contact comes to the end.
Personal finance: Your client might stick with service suppliers out of habit. This can include homeowner and auto insurance. Phone service, trash collection and cable TV are other examples. Heath plan coverage is another area. It is worthwhile to shop around at least once a year. Let your current provider know what you found.
7. Putting contracts out for bids. When a business decides to build a new warehouse, they often get at least three bids on the project. They list their criteria and ask companies to bid on the project. The cheapest bid might not always win. Other factors are important.
Personal finance: You decided to upgrade your kitchen. Perhaps a contractor talked you into it. You have paid for a plan. Get at least three quotes from other contractors.
8. Look for early payment discounts. Businesses want to save money when possible. An invoice might have a late payment penalty, but it might also offer a small percentage discount for paying early. They would take advantage of the discount is the cash is available.
Personal finance: Your property tax bill might be due on July 1st. There is a late payment penalty, but a 2% discount if you pay two months early. What could your money earn in the meantime? If it is less than 2%, take the deal.
9. Volume discounts. A business will look to see of they can reduce the cost per unit if they buy in bulk. You have heard the business expression “We make money on volume.” A business or purchasing department will look to see if buying more lowers the per unit price.
Personal finance: When you talk managed money or mutual funds with clients, talk about breakpoints too. They will understand “the more you buy, the cheaper it gets” from their business life.
10. Protect your credit rating. Businesses are rated by credit agencies like Standard & Poors and Moody’s. These ratings effect the price they pay to borrow money in public markets. Businesses try to maintain as high a credit rating as possible.
Personal finance: You have personal credit scores maintained by rating agencies too. Late and missed payments affect your credit score. Your score may determine if a bank will lend to you and the interest rate they will offer. Try to keep your credit rating high by paying on time.
11. Get senior management buy in before initiating new projects. In business, departments and divisions have goals. Often cooperation between units is required. Time dedicated to supporting someone else’s mission is time and resources taken from your mission. In business, it is important for word from the top to come down, saying “I want this to happen.”
Personal finance: In life, couples are a partnership. The debt of one is often the debt of the other. You should not decide to buy a new car to take on debt without consulting with the other person. If a debt is held in joint name, both parties need to sign, signifying their agreement.
12. Bring in an expert when the project is outside your skill set. You know the names of the big management consulting firms. You know a few engineering firms too. When a business embarks on a big project, they don’t “wing it.” They hire experts as consultants. They pay for advice.
Personal finance: You have seen the TV commercials about the guy trying to fix his kitchen faucet and the spouse saying you should bring in a professional. “Winging it” can often cost more in the long run. If you don’t know how to do the task, hire someone who does know.
13. Budget money for charitable contributions. It is good to give back. Businesses want to be good corporate citizens. It is also good for business because there are many reasons why customers choose to do business with one business instead of another. They will pay more too, if they feel their actions are making the world a better place. Organic produce costs more than ordinary vegetables, yet people are willing to buy them.
Personal finance: Sometimes charitable giving is an afterthought. You might put something in the collection basket or the Salvation Army kettle at Christmas, based on what you have in your pocket at that moment. It makes sense to determine in advance how much money you will give to charity each year, budget accordingly and then determine where it goes. Your company might have a matching gift program, stretching the value of your dollars.
14. Budget for gift giving. Businesses budget for everything. They want to avoid unanticipated expenses. They budget for year end bonuses.
Personal finance: Around the holidays you will hear news reports indicating how much the average family is expected to spend on Christmas presents this year. According to Investorplace.com, gifts represent about $648 of spending.1 Who seems to run the most frequent ads in December? Businesses selling perfume, cars and jewelry. That seems to be a much more expensive impulse gift. Set a budget instead of buying on impulse and tallying the cost in January.
15. Put idle cash to work. Do you really think businesses leave large amounts of cash in checking accounts, earning zero interest? Of course not! They are seeking to get a return on as much idle cash as possible.
Personal finance: People keep cash in checking accounts. They might keep cash they don’t need in low yielding money funds. Determine which amounts of money might be needed soon, but not now. Can you get a better return in a short term instrument like a Treasury Bill or Certificate of Deposit? Don’t leave money on the table.
These points should create “aha” moments for clients because they are performing the same actions every day with the company’s money.
Related: How a Couple Earning $500,000 Can Be Living Paycheck to Paycheck