Three Principles for Financial Management Success

Everyone is aware and knows how to stay fit and healthy: By doing exercise, having proper diet food and by maintaining positive mental health (sleep, stress, etc.). But very few know how to stay fit financially. Financial stability and success is equally as simple as staying healthy and after knowing them you yourself that they will be perfectly obvious.

Financial success requires three things. If you are an individual, a business, a family, a government, or a non-profit organization there are three principles everyone needs to follow for financial success.  What are those three things?

  • Earn more money than you spend
  • Invest the savings
  • Understand where the money is going and where you are

Principle 1: Earn more money than you spend

Most of the time we spend more money than we make. Americans do this constantly. Shocking evidence is most people are in credit card debt as they are unable to follow the first basic principle.

In reality, this problem of under-earning or over-spending cannot go on forever. At some point of time borrowing will run out, parents will cut you off; investors will no longer fund for a losing enterprise. When something happens we change to bring this imbalance to an end.

We adapt as individuals, at most we will lose our own cars, bring back televisions from the financier, and in the worst case scenario we will become homeless. Business understands this concept better than governments and individuals understand this better than businesses. When it is your money, matters are very serious. Yet, small business owners, who start businesses by investing the money which they have earned in their entire life (according to a survey 77% small business owners do this), sometimes they run out of cash by failing to understand principle 1.

What to know why this happens?  Read principle number three.

Principle 2: Invest the savings

As an individual person, this concept is easy to understand, but very difficult to implement. Less than 7% of Americans are investing on a monthly basis automatically. Business owners do a better job.  As they have a clear idea to grow their business when to hire new people, purchase new equipment, and which training programs to invest in.

Problem with small business owners is they start with principle 2 rather than starting with principle 1. Obviously, we cannot invest unless we earn and save. In most of the businesses this is called the “chicken and egg” problem, which comes first, the profits that generate the cash for investment, or the investment that generates the profits?

In many cases this argument is not valid. At some point, someone will help you to gather money, investors, loans, etc. to start their business from the scratch and take it to profitability. Our focus should be on getting to profitability as quickly as possible with minimum investment. So, investment comes first, but it must be counterbalancing force to profitability.

Principle 3: Understand where the money is going and where you are

One of the major reasons for high no. of divorce cases in India is due to stress about family finances not cheating spouses. As a business owner, you should enjoy successes and handle problems and troubles with great confidence.  Reasons for individual stress are not clearly known. When we get surprised by something, feel stressed, and then the situation gets worse, we start worrying about whether we are missing something else. Stress makes us make bad decisions, sleep poorly, irritate and finally life will become miserable.

Monitoring individual income and expenses and maintaining a personal balance sheet will reduce most of the stress about your personal finances. Additionally, a close track of the company’s income, expenses and balance sheet will bring down your stress at the workplace. Most importantly, if you are aware and have knowledge about financial numbers around you, it will lead to better decision making.

Better decisions will bring money. Better decisions reduce stress levels and make life more fun. Though these three principles are obvious and simple, only few people will be able to follow. In order to stand out from others, to be successful, to enjoy stress free life, follow these three golden principles while doing everything.

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