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Revenue minus expenses

One of the most important rules in personal finance is that you should live within your means. Sure you might be stretching to invest or start a business but, generally speaking, people who specialize in this sort of thing (which is not me) will tell you that it’s probably a good idea to spend less than you make.

The same is, of course, true in business. Businesses generally try to make more money than they spend. Similar to what might happen in personal finance, there are instances where a company might decide to forgo current cash flow for future cash flow. i.e. Invest in future growth. But at some point, not making any money needs to stop and the company will need to post a profit.

All of this probably sounds dreadfully obvious, but I often think of this very simple principle whenever I hear someone talking about something that should be done, but isn’t being done. Developers should be using triple glazed windows in all of their projects. The government needs to build a new subway line from here to over here. And the list goes on.

There’s no question that triple glazed windows will perform better than double glazed windows. And there’s no question that a subway right outside of my single family home would be pretty darn convenient for my personal needs. But all of these things, unfortunately, cost money. They are expenses. And unless the revenues are there to support them, they, funny enough, tend not to happen.

The same is true in personal finance. I should have a yacht in the Mediterranean. Why? Because having a yacht in the Mediterranean is typically better than not having a yacht in the Mediterranean. Sadly, the top line of my income statement tells me to, instead, focus my attention on the Toronto Island Ferry Docks.

Update: One of our engineers has advised me that triple glazing is not always better from a noise control standpoint. Laminated and heavier glass typically performs better from this perspective.

2 Comments

  1. Scott Baker

    It doesn’t always work so smoothly like that. Social Security generates between $1.80 and $2.00 for every dollar spent, according to two studies I cite in my book “America is Not Broke!” This is because it is spent instead of saved so it is stimulus not savings. Yet, many politicians want to cut so-called entitlements for political reasons, not sound economic ones. They somehow can afford to spend endlessly on wars though, despite the fact that military spending is one of the least stimulative enterprises government engages in, returning roughly 70 cents on the dollar, if even that (my figures are out of date on this one), providing few jobs to make things that blow up or become obsolete.
    Business too, wastes money: the economist William Lazonick has studied what corporations do with their money his whole career and he says they spend over 90% of their profits on buybacks and dividends. This leaves precious little for R&D, expansion, and retraining workers. Indeed, sometimes companies will actually borrow money for these things, after spending their profits essentially to benefit the C-Suite. This may work, sort of, in a low interest environment, but it rings up large debts that often can’t be paid when interest rates rise.

    Liked by 1 person

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