Three Differences Between Enterprise and Personal Finance

 

Personal finance and accounting

 

If you go to a church for financial assistance, you are likely to receive a lecture and advice about personal responsibility, and perhaps a lesson about tough love. But when that same church finds itself running a bit short, they pass the tray again accompanied by a different lecture. This one is likely to be about your responsibility to help out as a member of the community. This is a prime example of how personal finance and corporate finance are totally incompatible. Here are three others:

You Can’t Just Lower Your Expenses

When looking at personal finance, we look at something called fixed expenses. Technically, there is no such thing as fixed expenses. If the mortgage is too high, you can always move to a less expensive place, or try to refinance the place you have. But for all practical considerations, mortgage is an example of a fixed expense.

Utilities also fall in that category. We need a certain amount of water and power. We produce a certain amount of sewage and garbage. We cannot arbitrarily lower the amount charged by the power company, or opt for a cheaper solution.

But corporations have many practical ways to reduce expenses that were once considered fixed. The way companies deal with payroll is a prime example. The traditional way is rather costly in both time and money. ADP.com lays out some of the challenges of lowering payroll costs:

  • •Inadequate resources to implement paperless pay, including pay card, online statement and other payment options
  • •Managing change in many departments with different requirements
  • •Providing service to employees who may have different payment requirements

These costly challenges have plagued companies for years. Unlike you, they have the ability to opt out of traditional solutions and adopt modern software and services that can lower their expenses significantly. The ability for
corporations to lower what was once considered to be fixed expenses is a huge advantage not presently available to individuals.

You Can’t Just Raise Your Income

Imagine this scenario: The average price of groceries goes up again. So you walk into your boss’s office to explain the situation. You conclude your speech by telling him that you are going to have to raise the amount you charge for your services. He is simply going to have to give you a raise. Well, that was a beautiful dream while it lasted.

Corporations, however, have the option to do that anytime they want. The loaf of bread that cost you $2 yesterday, now costs you $3 today. With new dietary awareness, the white bread industry must be going through hard times. Their solution is simple. They just raise the price.

The cable companies are notorious for this type of strategy. Coming as a shock to exactly no one, cable TV prices went up four times the rate of inflation. When they are faced with competitive pressure for resources, they just charge you more.

Because this option is not available to individuals, we have to seek different solutions when we have to raise funds quickly. We have to beg and borrow while corporations exercise the third option.

You Can’t Get a Bailout

Ever heard the phrase, “too big to fail”? That is something that many corporations are, and you’re not. When a company that is too big to fail gets in over its head, they can look to the government to bail them out, like a profligate teen getting bailed out of jail by his parents. Investopedia lists the following as examples of the most notorious of the category:

  • •The Great Depression
  • •The savings and loan bailout of 1989
  • •The collapse of Bear Stearns, an investment bank and brokerage firm
  • •American International Group (AIG), an insurance colossus with global reach
  • •Freddie Mac and Fannie Mae, two government-backed mortgage lenders

When you get in over your head and do not have the safety net of a rich aunt, the government has no problem watching you fail. Your insolvency will not effect the GNP one iota.

Personal finance and business finance are worlds apart. If you happen to run a large business, be sure to keep your finances, along with your financial strategies separate.

 


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October 4, 2014 Three Differences Between Enterprise and Personal Finance