Become Your Own CFO: Calculating Your Monthly Net Profit
Have you ever daydreamed of what it would be like to run a large business? Of being an executive high roller in a high-rise? If so, you’re in luck, because your household has an immediate opening for a Chief Financial Officer. And you just happen to be the most qualified candidate to fill it.
The job requirements of a CFO are varied. They can include ultimate responsibility for everything from crafting budgets to managing cash flow and optimizing tax liability.
These facets all have an impact on the bottom line of every business. But there’s one metric that trumps all others when it comes to determining business success or failure – net profit.
What Is Net Profit?
Net profit serves as a measure of business profitability, and is universally calculated as income minus expenses. This is a fundamental concept in the world of business. Companies which establish and grow their profitability flourish (see: Amazon). Conversely, companies which can’t establish and maintain profitability quickly fall by the wayside (see: Radio Shack).
The Importance Of Your Monthly Budget Net Profit
Profitability is just as important to the health and success of your personal finances as it is to every Fortune 500 company. Consistent net profits in your monthly household budget will have you on the straight and narrow to financial freedom. But run up monthly budget deficits, and your future becomes far less rosy.
The next step in the Financial Freedom Project Budget approach to mastering your money is creating monthly savings goals in support of your financial freedom. But first you need to calculate your monthly net profit so you know what amount of savings is even possible.
How To Calculate Your Monthly Budget Net Profit
If you’ve been following the Master Your Money series from the beginning, calculating your monthly net profit should be easy since you’ve already done all of the required prep work.
The income portion of the net profit calculation consists of your net monthly household income from all sources. You should have already calculated this after reading up on how to cover first base of the FFP Budget.
The expenses portion of net profit calculation consists of the sum total of all of your required monthly spending. This exists in three primary forms – your monthly bills, non-discretionary spending, and the monthly equivalents of your quarterly, semi-annual, or annual bills. You should have already calculated these amounts after reading the how-to guides on covering second base of the FFP Budget and avoiding the unexpected bill scramble drill.
Start with your net monthly household income and subtract all of your required monthly spending as outlined above. What you’re left with represents your monthly net profit (if a positive number) or deficit (if a negative number*).
Tracking Your Monthly Budget Net Profit In Mint
You can confirm or deny your above calculations by checking the Mint Budgets Scoreboard. Located on the Mint Budgets page, this feature displays your projected monthly net profit by totaling your budgeted income and subtracting all budgeted spending.
The only monthly budgets you’ve created thus far in Mint should be for income and required spending only. Since this is the case, this summary should represent your maximum monthly household net profit.
From this point on, your monthly net profit as tracked in Mint will be the barometer by which you will measure your performance as the Chief Financial Officer of your household.
Why Your Budget Is Like A Fortune 500 Company
Business managers are often confronted with difficult decisions regarding how to allocate net profit. They must ensure the long-term viability of their business by investing in its future, while also keeping shareholders happy via dividend payouts.
Similarly, as the CFO of your household you will have to decide how to allocate your monthly budget surplus. What percentage will you use to invest in your future by way of savings? And what amount will you allocate to dividend payouts in the form of discretionary spending?
These are difficult and important decisions. Finding the right balance between savings goals and discretionary spending will be the focus of the next several articles in this series.
You may already perform many of the requirements of a typical CFO simply by operating your household finances. Think about it – budgeting, cash flow management, purchasing decisions, bill payments, tax preparation and compliance. You’re likely already doing all of these things on some level.
So go ahead, make up a name plate or a sticky note and slap it on your refrigerator or the desk in your home office – Household CFO. This will serve as a reminder of your new mission to focus on the monthly net profit of your household.
For those of you who have been following the Master Your Money series from the beginning, below are the next steps on your journey to financial freedom:
- Manually calculate the net monthly profit of your household as outlined above
- Verify that your calculations match the Mint Budget Scoreboard to ensure that you have added all required budgets to Mint
*Note: If both your monthly budget calculations and Mint’s result in a deficit rather than a surplus, please feel free to contact me directly so we can review ways to get your budget back in the black ASAP.
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