Understanding Financial Statements

It might sound silly, but there is an important education aspect to the bookkeping and accounting for high net worth individuals as well as others. That's understanding financial statements. Financial statements for the most part need not be complicated, but they often are. And the complexity arises from a lack of understanding as to what the concepts mean. So let's get into it a bit as a teaser.

The balance sheet is a snapshot of your financial condition at a point in time. You have your assets and your liabilities.

Balance Sheet

Assets may vary from portfolio investments, commercial and residential real estate, partnership or joint venture investments, venture capital, etc. The question that needs to be addressed in the context of a high net worth individual or family is do you include personal assets in your financial reporting? Remember that in a business we exclude personal assets. But our "family" financial statements have a different purpose, so perhaps we take a different approach. The purpose of these financial statements is to report on the financial condition of the family. As such all family assets and liabilities should be include.

That would include pretty much everything that you would like it to include:

1. Personal use property

2. Residential real estate

3. Second homes

4. Investments of any nature

5. Commitments that are personal in nature that need to be recorded

6. Stock options

7. Pensions as they become vested

8. Insurance

Just to name a few.

The liabilities side of the balance sheet would include the normal accounts payable and any relevant long term debt and whatever else might come up.

Income Statement

The income statement would reflect all income earned from any source whether it is salary, pensions, dividends, etc. Expenses would include all expenses incurred.

The point of the exercise is to provide useful reporting and analysis much like you would see in business, except capturing personal or family revenues and expenses.

Net Worth

In the end the financial statements will provide you with the family net worth. Ultimately, this should be the number everyone focuses on.

Cash Flow Statement

A cash flow statement can be prepared providing details on where the money went and where it came from. From a family planning perspective this is a pretty useful statement. The balance sheet and income statements will be prepared on an accrual basis, but ultimately you will like to know where your cash is coming from and where it's going.

Reports

Reporting can include revenues by categories, expenses by categories, comparisons year of year. In addition, if budgets are prepared, comparison to budgets. One important analysis thant can be extracted is for your professional fees. Keeping track of fees and the value of services rendered is important.

#Budgeting #highnetworth #personalfinancialreporting