Manage Your Finances Like a Company of One

By Jessica Dosseh

Being a company of one is about knowing the rules of business and putting that knowledge to work so that you have full autonomy over your own personal finance.

Let’s play a quick game: If your entire life was a company, how would you be built? How would you want to manage it?

Take a moment to consider these four things as you answer the question above:

• Create a structure for your company of one.

• Evaluate your financial health and earnings potential.

• How would you use liability as leverage?

• Consider risks and rewards in your decision-making.

What does it mean to be a company of one?

Becoming a company of one is a mindset shift that allows you to operate from the perspective of an entity instead of an individual. Being a company of one is about knowing the rules of business and putting that knowledge to work so that you have full autonomy over your work, life, and time. A company of one in terms of your finances is a reflective model that questions growth and risk in order to withstand economic climate changes.

Key takeaway:

• The three main types of financial statements are the balance sheet, the income statement, and the cash flow statement. Together they show assets and liabilities, revenues and costs, and cash flows.

• We all have access to leverage. What's important is determining which type of leverage is best for us.

• Determining risk that mitigates liability is an introspective guessing game.

The fundamental structure of a company of one.

Keep detailed records.

Data, data, data. Our world and the perception of success tend to run on data. Many people have come to the conclusion that the most successful companies keep the best records because by doing so, they know where their business stands financially and are able to determine what challenges they may need to face in the future. Detailed records can help to predict outcomes. Detailed records give you time to create a strategy to overcome obstacles.

So as an individual, why not do the same to evaluate your financial health and earnings potential?

TO-DO: Build out financial statements for your company of one. Take some time to analyze your financial health.

There are three major financial statement reports: the balance sheet, income statement, and statement of cash flows. These three statements are a breakdown of your economic activity and follow the Generally Accepted Accounting Principles (GAAP).

The main benefit of a personal financial statement is to show you how you operate. It also shows you how well or poorly your company of one manages itself over time.

What is a balance sheet?

A balance sheet is a snapshot of your net worth at a particular point in time. It shows what you own and owe. It's basically the inventory.

Assets = Liabilities + Owner's (or Shareholders') Equity.

• Assets – Assets are what you own–whether current, fixed, or long-term.

• Liabilities – Liabilities are what you owe (debt obligations).

• Equity – Owner's or Shareholders' Equity is what you initially invest and continue to invest into your company of one.

Your balance sheet should help determine if you have enough assets to sustain your financial obligations.

What is an income statement?

An income statement tracks your revenue and expenses. It is also known as a Profit and Loss statement. This document makes it easier to evaluate performance and for potential investors or creditors to assess your financial health. In short, it shows whether or not you are good with your money.

What is a statement of cash flow?

A cash flow statement determines how well your company of one generates income. It determines where your money is coming from.

Cash flow statements are broken down into three sections of cash use. These sections can either move in a positive or negative direction.

• Operating activities – This is the amount you use to run your day-to-day.

• Investing activities – This is the amount you use to invest in yourself, short-term or long-term.

• Financing activities – This is the amount you receive from investors, banks, or outside sources (the amount from loans, equity, stocks, dividends, etc.)

Although financial statements provide a wealth of information, it still has its own limitations, mainly because understanding the information collected is highly open to interpretation. The output of these statements is only as good as the inputs. This is why it's important to collect data over a long period of time. The clearer the picture, the better.

Here's the summary; In layman's terms keeping detailed records is a budgeting system from the perspective of a larger entity.

Shifting perspectives.

One of the major differences between the way companies operate and how individuals operate is through the use of debt. Debt is usually seen as a crippling factor for most individuals, but for companies, it can be the best way to leverage opportunities for potential growth.

The use of liability.

Debt can be a way to support growth because it's arguably a less expensive form of financing. Whether or not you choose to use debt to your benefit, it is important that you generate a solid operating cash flow system to maintain the debt's interest and principal payment obligations.

Let's take a quick look at the simplified difference between corporations and individuals.

• Companies → obtain income and liabilities → collect assets that generate income → use income from assets to pay expenses.

• Individuals → obtain income and liabilities → pay expenses → gradually attempt to collect assets.

The main question here is how well are you leveraging your use of debt. Is it used to your benefit or the benefit of the larger economy? Which should come first– general expenses or asset-based expenses? How do you tell the difference between the two? If your individual expenses come first, how do you pivot?

As a company of one, you naturally have different priorities, limitations, and general obstacles than a massive corporation. Nevertheless, defining and using leverage in a way that makes sense for you can potentially play a big role in the growth of your finances.

When using debt to invest in yourself (i.e., education) or buy appreciating assets (i.e., property, equity, commodities, etc.), make sure you understand the long-term and short-term consequences. Ask yourself how well will this debt help you to regenerate cash flow.

Is what you're putting in worth what you are getting out, and how long will it take?

This question can be one of the most challenging questions to answer because we all have our own way of justifying our actions. We all think we are making the best decisions for ourselves, but unfortunately, many factors go into determining a clear response.

Hot take: when it comes to debt it can't just be about the numbers (just because the perceived value is good doesn't mean it's worth it and vice versa). This is the point where deep introspection and critical thinking can make or break your decision making. So let's talk about risk.

Understanding risk and reward

As you start to grow financially, one of the key differences between doing okay and doing great will be your ability to take calculated risks. The truth is, much of business is a guess. Life is a guess and is fundamentally risky. When it comes down to it, it's not always about getting it right; it's about reducing the number of times you get it wrong. Risk (whether positive or negative) helps your company of one grow.

What are risks?

Risk is the attempt at leveraging opportunity with the potential for gain or loss.

Compared to a traditional company as a company of one your risk tolerance is a lot different. You are small enough where risk is mostly manageable but also large enough where risk can provide you with great returns if utilized well. It may not seem like it, but overall you have a lot more control over the different factors that may affect you because you are uniquely positioned at the intersection of producer, customer, and competitor.

Understanding, measuring, and mitigating risk comes with practice.

Practice jumping on a flat surface while gradually adding depth before you jump off a cliff.

Define growth to determine risk.

Risk is often used to scale an organization; however, scaling isn't always necessary for profitable success. So as a company of one, it's important to determine what growth means to you by deciding where profit and enjoyment reach the point of diminishing returns.

"For companies of one the question is always what can I do to make my business–(my personal finances) better?, instead of what can I do to grow my business larger?" – Company Of One.

Focus on better instead of bigger. More isn't better–better is better. Doing so gives you room to eliminate unnecessary overhead and time to think about how to make better decisions.

Decision-making.

Decision-making can be mentally exhausting and draining, and when that happens, it's easier to make bad decisions because you are tired of deciding. One way to handle this overwhelming feeling is to break down large decisions, become an expert at saying no, and become grounded in your decision when saying yes.

Risk is inevitable. Take accountability for your decisions, understand the surrounding factors, learn from them, then move on.

What can you do?

Define your vision, break down your problems, then make a decision.

After taking some time to write out your financial statements, it's time to start viewing yourself as a corporation. If your entire life was a company, how would you be built? How would you want to manage it?

Determine what your company of one's three growth benchmarks look like and list them using the financial data you initially collected.

• Start small — Ideally, what is the smallest you can accomplish today based on your current financial health?

• Mid-term perspective — What is your most realistic financial goal? What will it take for you to pivot?

• Idealistic view — If there were no limitations, how do you know when your company of one is financially healthy?

Now determine what you will need to reach each stage (realistic or not).

• Why would you need those specific things?

• Are you collecting the right assets to help you transition?

• What is the potential risk associated with each stage?

• What can you do to manage the risk?

• Is the risk worth it, yes or no?