An individual as a private company

I've been toying around with the idea that you can treat an individual financials as though it belongs to a company. Long time ago, as I was learning how to read financial statements - those pesky cash flow statements, income and balance sheets - I didn't realise that reading those are similar to an individual's statements. Let me illustrate:

Suppose I earn 100k in a year, but spent 70k, thus my savings would be 30k. Isn't this similar to a company with revenue of 100 mil in a year, 70 mil spent on costs, leaving 30 mil profits? Here's the interesting things:

1. Just like one can calculate a company's profit margin (profit/revenue), one can also do the same for a personal financial statements. Savings ratio (savings/total income) is very similar to a company profit margin and the analysis of it can equally be applied.

My savings ratio up to date is 60%. I didn't use total income, but used the basterdised version of it - total cash out/total cash in on a monthly basis (due to the nature of my job, there's a big difference between my income and the cash I get per month - that's another story for another day). It's lesser than last year, which goes around the insanely high amount of 80% on average. But hey, I'm happier this year and I definitely saved more in absolute amount. No regrets on spending money on people around me :)


2. A company that holds too much cash is not good because cash itself is not going to generate a good returns for the company. If you hold too much cash, you'll start to wonder if the cash is really there in the first place (think ass-shares). Similarly, for an individual to hold too much cash in the form of fixed deposits or savings accounts, it's going to reduce one's ROE (not the thingy that you eat on sushi - it's returns on equities).

For me, my ROE this year is definitely going to be low because I'm holding more cash than necessary. Why ah? "Me private limited" is going to have a amicable takeover with "her private limited", where the former is going to assume any profits and liabilities owned and owed by the latter. The impending fees involved would thus be reason enough to hold some cash to tide it over. Hopefully it's a good investment for me private limited :)


3. A company with weak balance sheet can withstand the storms of the business world. Likewise, a person with weak balance sheet cannot weather bad patches as well as someone with stronger balance sheet. What's weak balance sheet? High debts, low in cash high in 'assets' like cars are two things that come to my mind.

Here, we have an interesting situation. Too little cash is no good. Too much cash is not good too. Different companies have to adjust this cash ratio to suit their purpose, I suppose an individual have to do the same too. Just bear in mind the risk of holding too much cash.


Think I'll stop here. The good thing about learning to analyse companies is that you can analyse yourself as a company too :)