Personal financial statements and decision-making framework

Personal Financial Situation

The management of a Fortune 500 organization utilizes financial statements to craft corporate strategy on a quarter to quarter and year over year basis. These statements: balance sheet, income statement, and statement of cash flows contain crucial financial information which explicates how successful a company has been and its potential future prospects. These same three statements can be used by me as I face financial scenarios which require examination of assets, income, and its sources.

Financial Statements

I will look to my financial statements as I seek to purchase a home, save for retirement, and contemplate starting a small business. A corporation's financial statements are contained in the annual report distributed to shareholders; my personal financial statement will contain the same data in a single page format. The balance sheet portion "summarizes a company's assets, liabilities and shareholders' equity at a specific point in time (Investopedia. N.D.); similarly the statement will identify what I own and owe. The income statement "measures a company's financial performance over a specific accounting period, summarizing how the business incurs its revenues and expenses" (Investopedia. N.D.). For me the income statement details their income earned on a monthly basis and the dollars that are paid out in the form of expenses and debt payments. Lastly, the statement of cash flows details "all cash inflows a company receives from both its ongoing operations and external investment sources, as well as all cash outflows that pay for business activities and investments during a given quarter" (Investopedia. N.D.). My statement contains the sources of income and its eventual uses.

Home Ownership

I decide that I no longer wish to rent and instead choose to investigate the possibility of owning a home. After filling out the loan application at the local financial institution using information from my personal financial statement, the loan officer and I review the data. I work at General Electric as a network programmer making $48,000 a year, $4,000 gross a month; information found on the income statement. The bank requires a 20% down payment on the purchase of the $100,000 home. The financial statement (balance sheet) indicates that I have $25,000 in savings which can be used for this purpose. As for expenses and debt I have $1,200 monthly outflow which includes the new mortgage payment. The bank requires that monthly expenses do not exceed 36% of total income; I fall in line at 30%. After further review, a check of employment, and verification of the information on the application the mortgage loan is approved. The financial statements have provided the requisite information for my major life purchase.

Retirement Savings

Confidently set up in my new home two months later, I look at the financial statements to set up plan for saving for retirement. The statement of cash flows section details the $4,000 in income earned from GE, along with the expenses and bills of $1,200 which I pay on a monthly basis. Analyzing the statement I would like to build an investment portfolio to strengthen my assets, as well as eventually derive an income flow in retirement. Reviewing the balance sheet I see that my net worth (assets-liabilities) is $35,000. I have the $20,000 equity in the home, $5,000 left in the bank, and $10,000 equity in an automobile. My plan is to build the investment portfolio by contributing ten percent of my annual income. This will amount to a $400 reduction in my disposable income which I will reflect on the income statement and statement of cash flows. The portfolio will not be tapped until retirement and will provide a stream of cash flows when I stop working.

Building a Small Business

I enjoy the challenging work at GE however; I have additional time at night and on the weekends which I want to use to build a programming business. I will not be competing with GE so I have no conflicts of interest, rather I will work with small businesses to set up their web pages. In working through setting up a business plan, I find that I will need $10,000 in capital to get the business started. Reviewing the financial information, I find I will have to borrow the money either through the bank or on my credit card. The monthly cost of the new debt will be $250 a month. This will bring my expenses to $1,850.00 a month, putting me at 46% expense to income ratio. This is higher than I would like however, I expect the business to generate $600 a month in income after the first six months of operation. If I use this figure I will have $4,600 in income monthly and $1,850 in expenses, which brings my expense to income ratio to 40% which is satisfactory. I decide to go ahead with the business loan from the bank which is approved based on the strength of my balance sheet and income statement.