Tax season often illuminates financial management philosophies we could – and should – revisit. For me, reviewing revenue and expenses has illustrated a year’s worth of daily activities that really added up. Here are some considerations to check on a regular basis.
Start with structure
Many professionals still practice without a clear financial goal for the year. My wise accountant once distilled the goal-setting process down to these questions:
- How much revenue do you want to earn and why?
- What percentage of that revenue will you invest in your practice and why?
- How much money do you need to manage your personal expenses and reach your personal goals?
Adding “and why?” at the end of the first two questions uncovered some of my long-held beliefs that weren’t necessarily helpful.
I’m terrified of debt and live well within my means. I avoid making impulsive decisions. A psychoanalyst would probably have a lot of fun with me, but I have to admit that my prudence doesn’t always serve me well.
There are as many cognitive biases as there are ways to improve your profit and loss statements. Which ones might hinder your profitability? Common examples include believing that your client base won’t support increased fees or avoiding delegation because you believe it’s more cost-effective to do work yourself.
Admit what is and isn’t working
I suspected that I spent more restaurant meals in the name of business development than necessary. Then I looked at my pile of receipts in this category and realized I was right. Seeing the volume of paper was much more powerful for me than reviewing lines of data on my budget spreadsheet.
Which means that I need to respect my budget in the first place. My bad financial habits all stem from a tendency to avoid admitting when I’ve gone off track.
Experiment with new habits
Personal finance blogger Cait Flanders started a minimalism experiment last year. She’s trying to live on 50% of her income after noticing she had let “lifestyle inflation” affect her savings.
Some professionals might try becoming more disciplined about collections or capturing time. Others might vow to negotiate better fee agreements by incorporating a checklist into their engagement letter templates. I’m going to start with being more disciplined about the investments I make in business development.
What works for one person might not work for another. Which is why you probably need to schedule periodic assessments to into any new habits you’re experimenting with. An accountant, spouse or colleague could easily help. By this time next year, your perspective could be quite different and your profit margin could be much bigger.