The company is a for-profit organisation set up to conduct business with an ultimate aim to earn money. Money is priority, and while staff welfare and corporate social responsibility varies across a wide range, ultimately has the end result of maximising profits. Today we will explore the mechanics of a company and see if we can run our household like it. Naturally, we will focus on the finances part with the objective of financial freedom, since this is what this whole blog is about.
The Similarity
The household is similar to a company such that it has to continue running until the day it collapses or dissolves. There has to be income coming in to sustain the operations, and there will always be cost to run the operations. Often, there are debts incurred on the long term basis, and whether a company does well or not is often reflected in the balance sheet and the cash reserves. The family is like the small and medium enterprise (SME) which involves only a few people. Yet that few people are dependent on the company’s source(s) of income in the form of salary or allowances for food, shelter and daily living. Sometimes good things happen and the company prospers, sometimes unfortunate things happen and the household collapses.
The Income
Companies usually start off with a particular type of business, be it selling of a certain type of product or providing a certain service. Many businesses remain that way, staying small and focusing on that narrow scope. This is similar to how many household runs, with one or both adults doing one job only. While there is nothing wrong with it, we cannot remain satisfied with that if we are aiming for financial freedom. Just like how a difficult time will force many of such businesses to close shop, a retrenchment during an economic downturn can bring a family down if their only source of income is lost.
Big companies inevitably expand to other money making channels on top of their core businesses. Samsung for example, started off as a trading company, and later expanded into many territories such as electronics, shipbuilding, construction, securities, insurances and many more. Google, Mitsubishi, Huawei and many other big companies all over the world has more than just one category of business. This not only ensures multiple sources of income, it also provides assurance that if one sector is hit, they still have other sectors to cover for it. Likewise, on top of our main job, we should also try to expand other sources of income, be it doing a side business or doing another freelance part-time job. The sidelines need not be too time consuming, but of course, if we are aiming for financial freedom, we got to put in the time and effort.
There may be some arguments that if we focus on that one job well, we can also grow big and earn a lot of money. Companies like Nvidia and Unilever are examples. That is true, just like there are people who rise to the rank of CEO in big companies, but know that for most of us, we are just the average commoner with no chance of making it to the top. Many of us are doomed to rise as far as middle management, which is the first layer to be trimmed whenever cost cutting measures are in place. And of course, a gentle reminder here about Kodak and Nokia, which focuses on one business only.
Cost Cutting
In every business, cost control is one of the biggest thing in the bosses’ mind. How do I cut cost while maintaining efficiency and quality? How do I cut cost while not sacrificing staff welfare? If I have no choice but to sacrifice some efficiency, quality and staff welfare, what is the acceptable level? Similarly, we should look at our own household and determine what are the cost that can be cut?
One of the obvious things to look at in Singapore is the car. Is it necessary to buy a car when the public transport system is so developed? If it is necessary, must I buy an Audi or BMW if a Toyota or Honda can do the job just as well? Is it necessary to eat in fanciful restaurants instead of cooking or eating at a less expensive shop? Some may argue that it is necessary to enjoy or to indulge in certain luxuries once in a while, but we will come to that later. For now, we will only strictly look at cost cutting measures while not sacrificing the efficiency and effectiveness in the running of the household.
There are many things in a household which are excessive. From too many clothing to expensive houses, from the luxurious shoes to the overpriced phones, there are many big and small things which we need to take a hard look at and ask ourselves, if I do some cost cutting in this area, will it negatively impact the operations of the household? One should not be negligent in cost management. Many companies and household have failed because they were unable to get their cost within reasonable boundaries and under control.
Asset Acquisitions
The business world is full of mergers and acquisitions. Google acquired Youtube, and Meta acquired Instagram as well as WhatsApp. The list goes on. Different companies have different acquire different assets in accordance to their unique situation and strategy at that particular point in time. Some acquire businesses which will complement their own, some acquire their competitors, some acquire companies in a totally unrelated field in an attempt to branch out to other sectors.
Similarly, when managing the household finances, it is inevitable that we will acquire assets sooner or later, the first usually being property – the very house we stay in. Asset acquisitions in the business world usually accompanies with it a whole ton of homework on the target as well as negotiation. The homework included things like present and potential future value, whether it fits the current company strategy and the company’s buying power. Of course the actual thing is far more complicated than this.
But using the same logic, many people do not do much homework when it comes to buying new assets. Not only do they not research into the properties and stocks (most common asset class held by the masses) or any other asset class they buy, they based it heavily on feelings and emotions, preferring to take a short term gamble instead of fishing patiently for long term gains. They see the news and FOMO, they watch Tiktok or Youtube videos and got excited, they got swept by the hype around them. Even when they do research, they only focus on results which fit their preferred storyline. That was why when cryptocurrency Luna suddenly crashed, many of them were caught off-guard and sank to the pits.
While companies often acquire strategic assets which add to the value of their portfolio, households instead usually buy depreciating assets instead. Cars, luxury bags, luxury watches, over-priced condominiums and the list goes on. Many would argue that the bags and the watches will appreciate in value, that the housing market will keep going up and the like. But the truth is, many of such asset acquisitions are neither the most effective nor the most value for money, but instead have a lot of emotions and personal preferences mixed in.
The purpose of asset acquisition is to bolster the overall finances in the long term, not to look cool.
Cashflow
A healthy company will always need a certain sum of cashflow. This is to prepare for any unforeseen circumstances which disrupts the normal flow of operations. From wars to pandemics, from trade sanctions to inflation, there are many factors in this uncertain world which may give us a blow from nowhere. A healthy cash reserve guards against this, buying time for the company while the management sort out critical issues.
We have often heard of asset rich but cash poor people, and of internet gurus telling us that to hold cash is stupid. That cash erodes due to inflation, that cash is not earning as much money as assets. However, people always forget that barring the collapse of a currency, that cash is king in times of emergencies. Both companies and households cannot afford to come to a stage where they are forced to sell assets at a potential loss just to cope with the very short term cashflow problem.
Cash is insurance. Cash is life-saving. Does not matter if it may erode due to inflation. Does not matter if the fixed deposit interests is not yielding that much rewards as the assets. When it comes down to it, cash can save you. Many people say that a household should have at least 6 months worth of emergency savings, but personally, I think it should be at least 2 years.
Research & Development
R&D is a very important aspect to an organisation which wants to improve and climb to the top. Google, Apple, Nvidia, Tesla, OpenAI, Huawei, TSMC and many other companies across different sectors and countries pump in huge amounts of money for R&D. R&D is a very uncertain venture in which the results may not correspond to the time and effort put in. This is one of the reasons why despite reaching a certain size, many companies are still hesitant to develop their R&D branch. It is a money burning machinery. But because of the results of R&D, the top companies remained at the top, while many others minimally adapted to the times and survive for another era.
A household is the same. The people in the household need to continually learn and upgrade their skills. Be it honing their core skills, or be it picking up another skill. We can be realistic and know that the side skills we learn may never be as good as those professionals. But picking up a variety of skills opens more doors to opportunities, even if we may not see it now. Each skill we learn requires an investment of time and effort, and the rewards may not be as straightforward and quick. However, the more skills we have, or the more refined our core skill is, the more adaptable we are.
R&D may not be critical now, but it definitely helps in the future, one way or another.
Staff Welfare
This is where we talk about personal luxury. Spending the extra to buy a fanciful watch, a nice car, dinners at classy restaurants etc. Even within the company, staff welfare is necessary to motivate the employees. That is why there are the annual company dinners and the accompanying lucky draw prizes, the occasional company trips or the much mocked pizza party. But beyond that, certain companies also improves on the daily welfare, such as the daily catered lunch which actually taste good, the comprehensive pantry etc. All these are cost, but all these are essential to soothe the stress of the employees and to provide motivation.
Similarly, we also need some enjoyment in our daily lives. Although I personally do it, I would not recommend many to cut off almost all luxuries from their life. Suitable and appropriate spending on personal rewards can let us run a longer distance. But do take note that even at the company level, staff welfare is definitely not a big portion of overall expenditure. Similarly, as we are running towards financial freedom, you have to balance this aspect yourself.
Succession Planning
No one can run a company forever, because humans have limited lifespan. It takes time to groom a successor. Big companies start selecting and grooming their successor from a pool of candidates early on, letting them undertake various portfolios and rotating them across different divisions to get an idea of how things are run.
Similarly, we need to do that for our children. Too many children splurge on their inheritance money without consideration upon the passing of their parents – the very money which their parents worked hard, saved up and were hesitant to spend on themselves. Far too many act too emotionally towards their children and end up not doing the correct thing to raise them up, which includes discipline. Do we really want our hard work and money to all go to waste upon our death, knowing that our assets and cash will go to incapable people, though they are our children?
The first thing to do is to discipline the children properly. Discipline does not only encompasses the usual type of behaving like a proper human, but financial discipline as well. To know the how, what, when, where, whom and why of each expenditure. So that the children grow up not only to become a decent human, but to have good financial skills.
I have said that inheritance should not be given after we are dead, but when we are alive. This is also the same at the company levels. Many parent companies set up subsidiary companies, which are essentially the children of these parent companies. These parent companies then inject funds, talent and other appropriate assistance to help the subsidiary company grow. The growth takes time, often measured in years, before the subsidiary is able to be independent and function well on its own.
Likewise, our children needs time to be independent, to try things out and to fall before picking themselves up again. Taking a portion of their inheritance money in advance will give them the critical help and allow them to grow well. This is one aspect which many parents neglected, only to regret right at the end.
Conclusion
The management of a household is much like a company in its overall aspects. Afterall a household is a gathering of people related by blood, and a company is a larger gathering of people related by purpose. Management of humans is similar in many contexts, for human nature and human lifespan is more or less the same from 5000 years ago till now. By learning from the best examples, we can improve and do better.
In the next chapter, we will talk about how we can run our lives like how the top leaders run a country.
