Your Money or your Life!

  Critical Insights to financial balance in business

  Note:  John acknowledges the assistance of Helen Carrell from Inside Outside Management, Queensland with this article

 Ever wondered why accounting and budgeting seldom inspires people?  Conventional accounting practice does not generate true wealth!  True wealth is not the material things we own but in the daily satisfaction we enjoy from our lifestyle.  How many businesses focus on capital gains and interest rates while grizzling about the lack of community spirit and traffics jams at either end of the day?

  The primary purpose of conventional accounting is not financial planning.  Conventional accounting practice records your business history, information that is only of benefit for the IRD and others who love numbers.  It is a standard form that helps financial organisations to systemise business analysis.  It does not consider your entire situation because it doesn’t account for any social or ecological circumstances.  The irony is that figures generated by conventional accounting do not always accurately reflect your reality either; depreciation is the classic example.

  To get excited about any form of annual wealth planning, you need the freedom to create your own financial accounts. 

  But before allotting money to any expense, first there has to be agreement about direction and purpose of the property, business, and their connection with the wider community (on whose shoulders your success ultimately depends).  Only by knowing your desires and what you intend to create can expenses be prioritised and every dollar count. 

  So… what is the essence of your business?  Is it market share?  Profits?  Cashflow?  Lower debt?  Chances are none of these things; more likely what you personally value about what you do.  Our values are the core of who we are.  They seldom change and these need to drive the financial planning process, not the material things you want. 

  Family businesses trained in Holistic Management® create a holistic goal, a super goal that links opportunities and possibilities to their values and the resources that will sustain their values far into the future.  They then test all actions and decisions towards this to balance relationships, profit, and environment.

  Over 90% of problems on family businesses are not financial or technical they are social.  They are to do with relationships, communication, and trust between husband and wife and parents and children.  If you think you are poor now, wait till you get divorced!  Agreement about direction and purpose of land and business is essential for a strong family operation and in the excitement of a new property or business opportunity receive the least attention.

  It is during the goal creation phase that families discover the linkages connecting lifestyle to business to the enterprises that generate income.  Each income generating enterprise must be profitable to bring in the dollars and cover the overheads of the business and lifestyle.  The ideal business has few overheads and most expenses generating income directly.

  With Holistic Management Annual Planning every family plans progress towards a shared goal, not records the past for the IRD.  Therefore, they use categories and accounts of information that enhance their planning and monitoring for the coming period.  This information is meaningful, inspires, and stimulates families to take responsibility when spending their hard earned cash

  How much Profit do you want?

Usually when I ask farming families to list their expenses; fertiliser, chemicals, wages, standard charges… the list goes on.  What drops out at the bottom is profit – not that inspiring.  Without ownership and commitment to the financial planning process families often spend their anticipated income leaving little to invest in the quality of life they desire.  Problems compound when that income doesn’t materialise, a common occurrence in seasonal businesses.

  Conventionally businesses try to keep costs below anticipated income using past records and adjusting for inflation and cost trends.  Profit (or loss) is that left over after deducting the cost of borrowing.  Often figures are jiggled to suit the bank, and as long as figures appear cost effective the planned cash flows will cover any shortage the bank wont, and the world will be OK.  The slack in the system is from some expenses coming in under budget counterbalancing blowouts elsewhere.

Determining profit is the first exercise when annual planning.  This is not a taxable profit but money earmarked for the family to invest in what they value.  The Gross Profit Analysis guideline is essential number crunching tool to examine which enterprises are the most profitable for a family.  Planning for profit opens minds to opportunities creating a whole new attitude.  Families focus on what to do with their money rather than arguing over where to find it. 

  Once a family knows the sum they wish target or activities they wish to fund they focus their annual planning towards achieving it.  For example, a family decides to take a holiday every year no matter what their financial situation.  In a tight year they only use $500. 

A $500 reduction in their business marketing account may not seriously influence the overall profitability or productivity of the business, but missing a holiday would influence the dynamics of family life.  A $500 holiday is not everyone’s cup of tea, but what is important is a family knowing the kinds of experiences they value and creating it with the money and resources they have available – a great example of leadership.  Could your family enjoy a holiday on the back lawn if push comes to shove?  Making the choice to choose is an essential attitude in this process.

  How do we Prioritise Expenses?

  The focus of annual planning is on the big picture, not just the finances and this requires some different thinking.  After determining profit, the income left gets allocated to expenses in three categories of descending priority; wealth generating, inescapables, and maintenance.  These categories; target investment to strengthen the family lifestyle/business, cover moral and legal obligations, as well as maintain the business operation.  The various expenses we associate with conventional accounting fall into one of these categories. 

  Along with profit, identifying wealth generating expenses is a priority too.  These expenses strengthen the overall business and lifestyle, particularly any blockages to progress.  The Cause and Effect guideline examines whether an action addresses the causes of problems.  One couple I heard about in their first year of Holistic Management invested in three wealth generating expenses; portable electric fence, their Holistic Management educator, and a marriage counsellor!    

  It is when developing accounts of information that families become creative with their annual planning.  In asking, What are our expenses going to be this year and how will we prioritise them, many families find they have to split up what conventional accounting would lump together and lump together what is normal practice to separate. 

  Phone calls might separate into categories of social wealth, business wealth, and business expense depending on the purpose of the calls.  Operational costs like vehicles, materials, and labour might divvy up the same way. 

  Sometimes there isn’t enough money to cover all the expenses families are working with.  The Marginal Reaction guideline assists families to determine which expenses provide the greatest bang for the buck in progressing them towards their shared goal.  One family I worked with were mulling over whether to buy an organic ram to increase the hardiness of their flock or a more powerful energiser.  In choosing the energiser they gained quality time as a family because their stock gained greater respect for the fences.  This also meant they grew more grass and could run more animals.

  On the other hand if an enterprise requires an overdraft facility it would not be categorised as an overhead for the entire business but kept separate to ensure the enterprise pays for itself and generates a true profit to cover the business overheads. 

This process of annual planning gets people thinking about the lifestyle they want to lead and how their financial planning and discipline influences their progress.  Instead of a budget grounded in history, driven by external influences, and based on pure financial reasoning families create a budget that focuses on the future, draws on their desires, and tightens family ties. 

  It is during this preliminary stage of annual planning that family members draw on each other and those who support them for generating ideas to find additional sources of income, to shave the sum originally allocated to an expense, or which expenses to drop altogether.   

  The testing guidelines that accompany the process bring logic and reasoning to the decisions made so they encompass social and ecological considerations equally as financial factors.  This is where families can measure business and lifestyle growth not only by volume, but more importantly quality. 

  Are We Having Fun Yet?

  Furthermore, the activity of brainstorming options to address issues like a $500 holiday builds family unity.  Because children can be involved in the brainstorming process, everybody is heard resulting in a desire to take responsibility to help the family achieve its goals.  The organising of projects, holidays, and succession planning becomes much easier through streamlining decision-making and generating more productivity and creativity.

  Compare to what happens when you put together your tax return.  You have expenses and income accounts determined by someone else, who has little, or no knowledge, or concern of what you are managing, to record what you’ve previously produced in standardised financial terms for the sole purpose of determining how much tax you have to pay!!  Such rigid recipes suck your creative juices dry in no time.

  However, planning a budget is easy making it happen takes discipline.  Monthly monitoring to ensure each column of expenses pays for itself is the control process families must master.  This is the only way to focus on success by looking forward rather than behind.  Developing the habit and routines to ensure this practice is where many families initially struggle and where business coaching is helpful.  One family I work with take out a set amount for all household activities each month.  This sum covers their basic living expenses.  They buy anything extra if within the monthly amount.  Otherwise it has to wait until the next month and they have the cash balance to purchase it.

  Yet, the best indicator of success will not be the rate of return nor the net present value, but the question “Are we having fun yet?”  This is where children can be part of the monitoring process too as their behaviour often reflects family interaction and security, as well as providing direction for family activity.  Choosing to take control and create memorable moments with the resources you have is what every family aspires to, but its the confidence to choose this attitude that counts. 

  The most successful Holistic Management families have a deep ownership of what they value and everything that leads to generating it.  Focusing on the benefits quality of life brings sharpens management focus and prevents the scattering of precious resources.  By paying yourself first you can then afford to focus on quality of life, after all the farm is there for you not the other way round.  In this way you can change your lifestyle and business situation in your time, at your place, and on your terms.