Personal and Business Finance for non finance

Personal and Business Finance

1. Importance of personal finance management It helps the person cultivate the habit of budgeting their expenses and avoid unnecessary spending or prioritize their spending effectively. Another benefit of having good personal financial management is being able to allocate the resources properly and thereby using the available cash flow efficiently. It helps them save money and allocate it for sound investments on a timely basis. The benefits mentioned above also help the individual avoid any unmanageable debts and stay on top of managing their needs.

2. Important Points to Consider 1. Create a budget: Making a budget is the first and the most important step of money management. It is a fairly simple measure and has been used for centuries. In order to make a budget, estimate the amount of money you will ideally need to spend each month based on your income, lifestyle, and wants. Having such an estimate will help you gain more control over your finances, and accordingly organize your spending and savings. With a better control and awareness over your spending habits, you will be able to track and achieve your financial goals in an effective manner without compromising on your lifestyle.

3. Important Points to Consider 2 . Set financial goals: Having a financial goal allows you to stay focused and avoid overspending. So, plan what you want to do with your money in the short as well as long term. In order to achieve your long-term financial goals like your dream house, your child's education, retirement and much more you must start investing in financial products. Remember to always set realistic goals with set timelines. This will help you stay motivated and ensure that your money is well-spent.

4. Important Points to Consider 3 . Save first, spend later: As a rule of thumb, it helps to first save some part of your monthly income and then start spending your money on regular essentials like groceries, rent, electricity, loan repayments, insurance premiums, etc. This ensures that you are prepared for a future contingency and eliminates the chances of overspending or exceeding your budget.

5. Important Points to Consider 4 . Ensure protection against emergencies: It is always advisable to stay financially prepared for any kind of uncertainties in life. These uncertainties can be in the form of a job loss, an accident or an unexpected health emergency. Being financially prepared can help you deal with such situations easily. Insurance plans like term insurance, health insurance and critical illness insurance can help you to secure yourself and your loved ones financially in case of an emergency. Also Note: Do not club the insurance needs with investment needs. Keep them separate as much as possible.

6. Important Points to Consider Keep a track of your expenses and Income.. Use tools such as excel or any mobile app for it. At least plan your personal detailed cash flows for 1-3 years and major cash flows for 10+ years..

7. Business Finances

8. Important Points to Consider Keep your business entity and finances separate: Sole Proprietorships - Unlimited Liability Proprietor and Business are same entity. Partnership Firm - Unlimited Liability Partner and Business are same entity. Limited Liability Partnership (LLP) – Separate Entity OPC – One person company – Separate Entity Private Limited Company – Separate Entity Public Company – Separate Entity

9. Sole Proprietorship Features of Unlimited Liability:  Just as a partnership, a sole proprietorship has no separate existence. Therefore, all debts can only be recovered from the sole proprietor. Therefore, the owner has unlimited liability with regard to all the debts. This should heavily discourage any risk-taking, which means that it’s suited to only small businesses. If you plan on running a business that requires a loan or may end up paying penalties, fines or compensation, it’s best you look into registering an OPC Easy to Start:  There is no separate registration procedure for proprietorships. All you need is a government registration relevant to your business. If you’re selling goods online, a proprietor would only need a sales tax registration. Therefore, starting up as a sole proprietor is relatively easy

10. Partnership Firm Unlimited Liability:  On account of unlimited liability, the partners in the business are liable for all of its debts. This means that if, for whatever reason, a partner is unable to repay a bank loan or is liable to pay a fine, this can be recovered from his or her personal possessions. Easy to Start:  If you choose not to register your partnership firm, all you need to get started is a partnership deed which you can have ready in just two to four working days. Even registration, for that matter, can be completed in a day once you have the appointment with the registrar. As compared with a private limited company or LLP, the procedure for starting-up is much simpler Relatively Inexpensive : A General Partnership is cheaper to start than an LLP and even over the long-term, thanks to the minimal compliance requirements, is inexpensive. You would not need to hire an auditor. This is why, despite its shortcomings, home businesses may opt for it

11. A quick comparison

12. Accounting Profit, Opportunity Costs and Economic Profit Accounting profit is straightforward and precise: revenue minus explicit costs. Opportunity costs are the profits that a business misses out on when choosing to pursue one business venture over another. Economic profit is the financial amount that remains after subtracting both explicit costs and opportunity costs from revenue. Economic profit is used for internal analysis and is not required for transparent disclosure. While theoretical, economic profit computations can help a company size up and choose between potential business ventures.

13. Economic Profit Economic profit = revenues − explicit costs − opportunity costs ​

14. Economic Profit A person took $1,000,000 out of a savings account to start a business. The savings account had been paying an interest rate of 10%. The person also quit a job to work in the business; the job had been paying $100,000 per year. During the year, the capital cost $500,000, the hired labor cost $600,000, and the natural resources cost $500,000. In the year, the sales revenue was $2,000,000. Account Profit = Revenues – Total Cost 2,000,000 – 1,600,000 = ACC Profit = 400,000 Economic Profit = Acc Profit – Implicit Cost = 400,000 – 200,000 = 200,000

15. Which implicit costs (opportunity costs) need to be considered Opportunity cost of Labour – Salary Benchmark for Realtor’s time in his/her own organisation (if was employed outside) Opportunity cost self-owned (non-rent paying) office or other tangible assets used for business – Loss of rent if leased outside Opportunity cost of capital – If not invested in business, what minimum return it could generate (e.g. Fixed Deposit)