I recently announced that I will no longer be publishing income reports here on Leaving Work Behind.
Reactions were mixed — from disappointed to supportive (and combinations of the two). While I knew it was the right decision for me, I was curious to observe what you guys thought.
What I found most interesting was that not one person commented on how no longer publishing income reports might affect my business. After all, I said in the post that I would no longer be keeping track of the money I make on a month-to-month basis. I’m surprised that no one picked up on that and called me crazy. After all, what kind of businessman doesn’t know how much money he’s making?
In this post I want to reveal the only figure that really matters to me and explain how my income reports have been misleading me for a long time.
The Only Figure That Matters
I wasn’t even keeping track of the only figure that matters until I started thinking seriously about stopping income reports. In fact, my income reports were actually preventing me from seeing the real truth of my financial situation.
So what is the only figure that matters? Simple: total liquid capital — i.e. the amount of freely available cash you have in your bank account(s).
On the 20th of every month, I take five minutes to add up the money in all of my accounts:
- My personal current account
- My personal savings account
- My business current account
- My two PayPal accounts
I exclude any money I put aside for tax. If I had any money tied into investments, I would exclude that too, but I would include any income produced by those investments.
I log these figures in a spreadsheet and compare the total to the previous month. If this month’s figure is comfortably higher than last month’s, I’m happy. If the figure is getting a little too close for comfort or is in the red, I know I need to take action.
More than any other, this figure represents reality. It’s not just a number on a page (like all of the numbers I had in my income reports); it represents the actual cash I have in my bank. It represents my financial security — my ability to live my life in its current guise.
In my opinion, any figure which distracts you from your total liquid capital should be discarded. Nothing is more important.
Money: What Really Counts
People are obsessed with income, but that is only one piece of the puzzle. When it comes to financial security and preserving your way of life, all that truly matters is your liquid capital, which is directly related not only to what you make, but what you spend.
If someone publishes an income report saying they made $20,000 in a month you can be impressed, but what if they spent $30,000 on a new car too? They’re $10k in the red for that month now. Yes, big-figure income reports are impressive, and few people are going to drool over how much money you saved in a month, but those of us in the real world should apply just as much effort to reducing our outgoings as growing our income — especially considering that reducing your outgoings is typically far easier.
I have been hiding from this truth for many months; my income reports have kept me ignorant. Thankfully, with them behind me, I can now see the reality of my real financial situation from month-t0-month.
Ignorance may be bliss, but I’m glad to have had my eyes opened.
But What About Growth?
Although I often say that making money isn’t the most important factor when it comes to running my business, it is still important to me. More money means more security and a greater freedom to mould my business into something that I find as rewarding as possible.
So although I may not be keeping an eye on my specific income figures, I will continue to observe my business’ performance in terms of profit — albeit on a more intuitive level.
My method is quite simple. I can split my business’ main sources of income into three piles:
All I need to do is keep an eye on those figures. I’ll periodically check in on how each income stream is doing (by taking a quick peek at sales figures / projections), and if I spot that anything is awry, I’ll take steps to improve the situation. That’s it.
Could I improve my bottom line by keeping a closer eye on the numbers? Almost certainly. But as a business owner, one can always make more money — one of the key determinants of your profitability is when you choose to say “enough is enough” and apportion more time to other parts of your life.
That’s all I’m doing with my approach. I suppose the only difference is that my relatively laissez-faire attitude — born out of non-profit-oriented priorities — is somewhat unusual.
A Shocking Discovery
Now let’s talk about how my income reports have been “wrong.”
It actually took me stopping income reports to discover that my financial situation isn’t quite as rosy as I realized. Ironically, those income reports were shrouding the truth: that my liquid capital hasn’t been growing as readily as I thought.
Here’s a snapshot of the figures since I started running them:
On the surface the growth may seem pretty healthy — an increase in liquid capital of ~£2,200 (~$3,500) in less than two months. However, it should be put into perspective. Not only is the surplus gross of tax deductions (and therefore far smaller on a net basis), my income reports had led me to believe that my growth would be more impressive.
For example, my final income report in October announced total earnings of ~$7,500 (~£4,600). My budgeted outgoings are approximately £2,600, which means that my liquid capital should have increased by £2,000 in that month alone. That projection is not reflected by the figures above.
The overriding issue is that my projections are just that: projections.
Firstly, I know that what I budget to spend may not be what I end up spending. Secondly, because of the vagaries of accounting and financial transactions, my income reports did not necessarily reflect the amount of money that ended up in my account in any given month.
The explanation lies partly in the way that I created my income reports: a combination of cash and accrual accounting. I would add up the amount I invoiced to clients, plus what my affiliate partners’ reports said for the month, plus total information product sales, minus cash expenditure in that month.
For the most part, the income I reported would eventually end up in my account, but not necessarily in that month. For example, there is a 90 day holding period on Westhost affiliate payouts, so if I generate $1,500 in sales in January 2014, I won’t get it until April 2014.
The other reason why my income reports did not reflect the money that hit my account was currency charges. I receive the bulk of my money in US$ through PayPal, and they take a very healthy piece of the pie for converting that money into pounds sterling (my native currency). It really hurts to be “double taxed” by PayPal on transaction fees and conversion fees, but that’s the reality of the situation I face.
The moral of the story is this: income reports can be misleading, but the amount of liquid capital you have in the bank can’t. It’s the only truly “honest” figure available.
So What Now?
I’m not panicking. You should know by now that panicking isn’t my style 😉
After all, I’m still making money, and my income reports were broadly correct — while you can take off an amount for conversion charges, the income reported from one month to the next will hit my account eventually.
I now have a far greater awareness about my money than I did before and as such am in a position to make more informed choices — relating to both my income and expenditure. It’s not sexy, but there, I said it.
At the end of the day, money is only money. It’s often put up on a pedestal, but there is more to life. Don’t get me wrong — we all need money to live in relative comfort and security, but earning more than that is a pleasure often blown way out of proportion.
I will strive to increase my income because more money is a good thing (if you treat it with respect). However, it is just one piece of the puzzle when it comes to living a fulfilling life. We’d all do well to remind ourselves of that regularly.
Photo Credit: Jordan Lloyd