Basic Bookkeeping Lesson 2 – Run your household like a business

I firmly believe that you should run your household like a business.  There are a number of advantages to this including:

  1. You can separate emotional purchases from logical/strategic purchases more easily.
  2. You are more likely to keep the profit motive in mind while you run your household.
  3. If you run your household well, then you will progressively increase your standard of living in the same way that a business progressively grows over time.
  4. It encourages everyone in your household to contribute to the maintenance of your household, especially if they get a direct share of the household profits.

I’m going to begin this article by discussing a few universal decisions that need to be made before you start a business.  I will then translate those same universal decisions into how to begin running your household as a business.

Run your household like a business is Lesson 2 in my Free Online Bookkeeping Course.

7 Decisions you need to make before you start a business

Since the requirements of starting a business vary from country to country, this is by no means a complete guide on how to start a business.  This is only intended to give you a basic guideline of a few things you will need to think about before you start.  The decisions I describe below apply to every business around the globe.

1. What goods or service will your business provide?

Your choice of what service or goods you are going to provide may be based on your skills and abilities, but the most profitable businesses are those that see a need in the community and fulfill that need. For example, it is pointless starting a photography business in a community that barely has enough money to put food on the table. Once again you must have a look at Maslow’s hierarchy of needs and see where the community as a whole is on the hierarchy.

If you are wanting to start a business that offers goods or services that are not in demand in your area, you may have to start an online business in order to make a profit. Through an online business, you are tapping into the global market.

There are 3 types of services that businesses can provide, Personal services, Commercial Services and Trading Services.

Personal Services are services rendered by doctors, nurses, dentists, attorneys, estate agents, architects, accountants, hairdressers, photographers, artists etc.

Commercial services are usually rendered by a service business, like transportation, storage facilities, electrician, plumber, carpenter, banks, insurance companies etc.

Trading Services include general dealers, speciality stores, department stores, chain stores, supermarkets, hypermarkets and online order businesses.

2. Type of ownership

The second thing you need to consider is whether you are going to be a sole proprietor, a partnership, a close corporation or a company. I am only going to discuss a Sole Proprietor and a Partnership below, as I don’t have experience with a close corporation or a company.

A sole proprietor has only one owner, that would be you. These are normally businesses such as butcheries, bakeries, hairdressing salons, or home based businesses. The owner is responsible for finding the funds required for the business and accepts responsibility for all risks involved in the business. You take responsibility for all profits and losses.

A partnership is used for a business that has at least 2 owners (but usually not more than 20). Partnerships may be businesses such as motor dealers, furniture shops, medical practitioners and law firms. The partners are usually jointly responsible for all debts of the firm. They share profits and losses in the ratio stipulated in a partnership agreement.

3. Choosing a name

A business’s name is going to stick around for a lifetime. It needs to age well and promote a positive image about the business. A name such as “Devil’s Ride” may be great for a motorbike shop when you are a rebellious 20-something, but you are limiting the demographic you are selling to by doing so. In other words, you are less likely to get a soccer mom buying a motorbike for her teenage boy at your shop. So keep in mind how your business may need to develop over the years when choosing your name.

4. Geographic location and building size

Now that you know the type of business you want to start, you should take a look at where you are going to have your business premises. Are you going to run the business from home? Do you need to rent or buy a warehouse or other office space? And where will you get the most foot traffic if you do rent or buy a building? How big does the building need to be? A supermarket will need much more space than a hair-dressing salon.

5. What equipment is needed?

Every business is going to need some basic equipment, even if it is simply a computer with an internet connection. You need to figure out exactly what equipment is needed by your business and make a list.

6. Website

I strongly advise that you budget a website into your business start-up costs. For more information you can read the article I wrote for our business, WebworxX Web Design, on why every business needs a website.

7. Funds required

Lastly, once you have all these things listed, you need to calculate how much money you will need to invest to get your business started. It normally takes some time before a business starts making a profit, so you need enough funds to survive until then.

7 decisions to make before you run your household like a business

If you are planning to run your household like a business, then the 7 steps above can help you get started, here is how.

1. What goods or services does your household provide?

These are the things that your family has because they live in your household. For example, your household provides those living in it with laundry, food, shelter, clothing, entertainment, security etc. I suggest that you make a list of what your household provides it’s members. Separate it into two lists, Basic Needs and Luxuries. If tough times hit then you start to remove expenses from the luxuries list first. Here is my household’s lists of goods and services provided:

Run your household like a business: Needs and Luxuries our household provides | www.AuthenticallyAsh.com

2. Type of ownership

I like to view my household as a partnership between all adults within the household. All adults in the household need to contribute to the expenses of the household in some way. Our household is a partnership between my husband, myself, his parents and his uncle. We are the 5 adults who live in this household, so we all contribute to the well-being of the household.  This is a form of communalism.

3. Choosing a name

If anybody has read Jane Austen books, or any book by a British author, you will notice that there was a habit of naming houses and cottages. For example, Pheasant Cottage, Rosings Estate etc. I like to name the household as it gives it a sort of formality when you are busy doing the bookkeeping for your household. I refer to our household as “The Letley Household”, Letley is our surname. Using a surname is the easiest way to name the household, but if you have many people of different surnames living in your household you could also come up with something a little more creative and fun. Use your imagination.

4. Geographic location and building size

Just like a supermarket has different space requirements to a hairdressing salon, a person who is single has different housing needs to somebody who has a family. I strongly recommend living within the requirements of your family. It doesn’t make sense for a single person or a retired couple to have a large 5 bedroom house. You can save a lot on housing expenses by living with the minimum space required. You should also look at the geographic location of your house. I know a person who could afford a 4 bedroom, 3 living area house in a reasonable area, but chose to rather live in a 2-bedroom, 1 living area townhouse in a brilliant area. The reason they chose this was because the family was out of the house everyday from 6:30am to 7:30pm anyway, they just needed their home space to sleep and eat in.

Mark’s parents have house that has 3-bedrooms, 2-bathrooms, a dining room, a living room, a small study, a large office, a kitchen, a laundry and a double garage. They also have lots of garden space. When Mark’s brother moved out, there were only 3 people living in this house and Mark and I worked there during the day. Mark and I own a 2 bedroom, 1 bathroom townhouse which we basically slept and ate in. We decided that a good financial decision would be to move in with Mark’s parents and rent out our townhouse. We did this to lower the monthly expenses, and help his parents with their monthly expenses.

I advise that you take a long hard look at what your family really needs in terms of space and write it down. You could make 3 lists, namely: Must have, comfortable, luxury. On the must have list, you would say how many beds (not bedrooms) you need to fit into the house, plus a kitchen and a bathroom. Comfortable would be a bedroom per adult couple, a room for for every 2 girls and a room for every 2 boys. Luxury size would be a room for each teenager, a room per adult couple and a nursery for the children under a certain age.

5. What equipment/vehicles do you have?

As you wouldn’t be starting from scratch (like with a business), I advise that you make a list of the equipment and vehicles that you have for your household right now. Examples of equipment would be: Ford Bantam, Mazda MX-6, 3x Televisions, 4x Computers, Dining room table, lounge suite, stove, 5x desks etc. By taking a complete inventory, you will easily be able to see what things are unnecesary in your household. The unneccesary items you can look at selling later on.

6. A website

A website isn’t necessary for your household, but I have found that a blog is a very easy way of keeping the extended family up to date with what is going on with your children and your lives in general. You can get a free blog from wordpress or blogger. If you want a custom domain for your family, you can always contact our business ( WebworxX ) to register one for you and install a WordPress system on it for you. There is a small fee involved, but we have noticed that because of the exchange rate between South Africa and the rest of the world, it works out cheaper for most our overseas clients than getting a business to do it in their own country.

7. Funds required

Lastly, you need to take a good look at all the household expenses, and the expenses of every family member within the household. You will need a full list of everything that needs to be paid for everyone within the house. There is no room for financial secrecy or for being selfish. It is important to point out that if a person wants to live within the household, they need to contribute to the expenses of the household. In my lists below I am only including the debit orders that go off Mark and my accounts. We also have a budget for food and so on, but that we adjust according to our monthly income:

Run your household like a business: Letley Household Expenses | www.AuthenticallyAsh.com

Conclusion and tasks:

As I have mentioned in the introduction of this article, this is by no means a complete guide to starting a business. I want to focus more on bookkeeping than on business creation and management, but since every business needs to start somewhere, I felt the need to lightly touch on this topic.

Before you go onto the next section of setting up your household bookkeeping please do the following tasks:

  1. Have a family/household meeting to discuss the finances of the household and explain that you are going to start running the household finances like those of a business.
  2. As a family, make a list of all the goods/services your household provides. You can get the kids involved in this one too.
  3. Explain what a partnership is and how the adults in your household are partners in providing for the needs of the household.
  4. Discuss if the geographic location and building size of your home is suitable, or if you can make a change that will save money or make more financial sense.
  5. As a family, make a list of the equipment and vehicles your household owns. Decide on what can be sold and what should be kept.
  6. Does your family want a website, and who is going to be responsible for building it and updating it with all the family news?
  7. Finally, make a list of the expenses of all the adults in the house, and the combined household expenses so that you know how much money each person MUST have in their bank account each month. If a person doesn’t want to tell their exact amount of income and expenses then you can make an agreement with that person that they are solely responsible for paying a certain household bill, like buying the groceries, or paying the property tax. It is important that every adult contribute in some way. If the adult doesn’t earn an income, then they must take responsibility for household chores instead.
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