The West Indian great CLR James once said, "What do they know of Cricket, who only Cricket know?" Thus, implying the importance of applying concepts and knowledge from more disciplines than the supposed subject. This thought and a conversation with a friend some time ago, propounded me to think of how the analysis of a Balance Sheet can be transferred into the Analysis of Life itself.
As a finance student, I've always been taught the importance of The Balance Sheet. Perhaps, the most sacrosanct document along with the Income Statement for a company. If we look no further, than our own lives, it actually applies to us as well.
The components of a Balance Sheet, if broken down and compared could be something as follows. It should, however, be understood that, all components and their constituents are only an indicative list, not an exhaustive one. Just the way it boils down to Corporate Governance in a Company, it's Subjectivity that rules our Balance Sheet of Life.
Liabilities - Now as the case in a Company, this section of life is all about Resources. The resources out here mean non-monetary, love and duty bound relationships and yourself.
Equity - You and Your Immediate Family. Just how the prime motive of the company is to ensure maximum return to Equity holders, your purpose of life is to ensure maximum returns in terms of Joy and Happiness to yourself, your immediate family and those who you choose to give Preference in terms of inviting them on to your Inner-circle.
The equity holders are made up of Promoter - You, Institutions - Family and Retail Investors - Friends, Extended Family and the Inner Circle. The Preference Shareholders is your partner or anyone you choose to include based on your own preference.
At times, just as equity holders can also infuse debt, in personal and institutional capacity, you may also be indebted to the same persons as long-term creditors for different reasons.
Debt - Anyone who has ever had a long lasting impact in your life in the form of a life changing advice, selfless care or moments that you'll cherish forever, you are indebted to them.
If you give a man, fish, he eats for a day, If you teach a man how to fish, you give him food for life. Therefore, your biggest Debt Holders are Teachers. Not just School, College or B School Profs, but any one, who, you've happened to learn something or anything from.
The outflows to debtors in your life have to be two pronged. Firstly, Constant appreciation, respect and remembrance and walking on the path shown by them would be your interest payments. Finally, bringing glory to them would be repayment of Principal, in part, as most people you're indebted to in life are often, debt holders forever.
Just like a company, the return on equity is a function of ROC and Leverage. However, there is a fine balance to be maintained, as under-leverage may give back lower returns to equity than potential and too many debt obligations would ensure, you have no time for equity holders and thus bankruptcy risks.
Current Liabilities - This part of the Balance Sheet is slightly materialistic and subjective. While you know, you're indebted to a lot of people for life, a bit of give and take, only makes it fair for all the parties. It's about making sure you give back what favors you've accepted in life, material or non-material. For instant, Small gestures such as a person who's helped you by virtue of his influence, position or affection towards you, given you a present, landed you a job interview opportunity, helped you when you needed it most and many similar things, should be repaid by you doing the same when you can, and more often than not, more than just the same. The thumb rule would be try and do at least 10% more for a person who's a current creditor, than what you've received from him, material or non-material.
An important part of current liabilities is Current Portion of Long term debt, which in life can be believed as to, a long-term debt holder of yours, is in an urgent need of help, any kind. As a company it'd be one's duty to fulfill that obligation.
Words like Repayment and Obligation are hard terms to be used in daily life parlance and human relationships, but it's important to recognize the give and take cycle, for better living.
Assets - This part of the balance sheet is all about what we have done with whatever we've received from the equity holders in terms of love and resources and debt holders in the form of knowledge and habits. The first 30 years of lives make our habits and knowledge, the next 30 years; our knowledge and habits make our lives. So Asset Allocation is equally, if not more, essential in The Balance Sheet of Life.
Goodwill - Now a company cannot create it's own goodwill; it has to do so by acquisitions. Your goodwill is nothing but the Credibility and the Value System of your associations, the friends you keep, the family name, your school, your college and your workplace. This can be amortized over a period of time, as over time, your own performance and not your pedigree, or qualification, is important.
However, another important component of Goodwill is your Integrity and Karma. It may be intangible and invisible, but certainly indestructible. Finally Goodwill also includes a factor called “God-will”. This is sheer luck and God's Grace, can't be measured, nor acquired. Major source of this is Faith and Belief.
Fixed Assets - Your fixed long term assets are what you have done with the knowledge you've acquired and the love you've gained. It can be in the form of giving back to the Society by making it a better place to live in, with your work, intellect, actions and words. In doing so, the name, fame, fortune and happiness that you gain are all the returns on these assets. The Body and our health are our plant, machinery and building. Thus, maintaining the same is essential. Our Relationships with people and products, what we Do, not just, to make a Living, but to make a Life, is our biggest asset. It's very to ensure that we're adding something worthwhile on to whatever we've gotten for only then, will our ROC will be greater than our WACC.
Again, like all fixed assets, these depreciate over time too, so it is important to keep applying ourselves and exceeding ourselves always to optimize asset utilization.
One fixed asset that doesn't depreciate over time is Land. In case of Life, the field of Expertise you choose, in either profession or education, is the Land. Ensure that you always continue to appreciate it in value by pushing boundaries, and the biggest parameters of that are Passion and the Quest for More.
Investments - Time, energy and resources spent in bettering yourself intellectually or physically, through, a book, a hobby or an exercise or anything that satisfies the soul are Core Investments. Their returns are accumulative and exemplary over the long run.
Anything that you've done for others, by helping them is your non-core investment. All Social Voluntary Activities fall under this category too. What might be Investments for us are actually Debt or Equity for others. So it is essential to understand that we do the same to others, what we expect the others to do for us as Stakeholders (equity or debt).
Current Assets - What we consider as Current Liabilities for ourselves are again, current assets for the counter parties. Therefore, whatever we've done for others in our capacity, are our current assets. However, it's also important to make a provision for Bad Debts based on a few past mistakes and Wrong Calls as they'll help in reducing grief and high expectations of realization of those assets.
The Yield Curve of Life is upward sloping; therefore it is not advisable to fund short-term assets with long-term debt. Thus, fuming with a long-term debt holder with something short term and temporary could be very expensive.
Inventories are the networks we build over time, which will help us, help others and ourselves. Just like physical goods, these are often difficult to realize at a short notice, but current assets nevertheless.
Cash - As we all know, this is the most liquid of all assets and perhaps the most important for our needs too. Cash in the Balance sheet of life is actually 3 things, Time, Energy and Actual Cash. We may choose to use these wisely and allocate among our activities. While, excess uninvested cash, is unproductive and it's value decreases over time, Scarcity of the same would make day-to-day survival very difficult. Also, In times of doubt, having time, energy and money in hand is the best. So these three components function just Cash in our lives.
Thus, managing The Balance Sheet of Life will lead to Health, Wealth and Prosperity, thus cumulatively Happiness, which is indeed, the Purpose of Life. While at this juncture, when we aspire to be CEOs and CFOs of the organizations we'll work in, or start, it'd be great to quarterly review our own personal Balance Sheets and our Individual Performance against our Peers and Ourselves. The Market or outsiders may value us positively or negatively, depending on the short-term sentiment, but eventually it's our own assessment that'll stand the test of the long run for We are Our Biggest Stakeholders.
(C) Mangalam Maloo 2011.
