Owners of business and professional practice know that they cannot effectively manage their company without understanding its financial position. Similarly, when it comes to drawing up a comprehensive wealth plan, they also need a basis for assessing their overall financial status.
“Balance of life” provides a complete picture of the owner’s assets, liabilities and own value. Although similar to the more traditional balance sheet used to monitor their company, the Balance of Life includes both real and implicit assets and liabilities.
The left side of the sheet lists the owner’s assets and includes traditional financial assets (cash, stocks, bonds, alternative assets, etc.) and other tangible assets (real estate, precious metals, art collections, etc.). It also includes implied but expected assets.
Imitation assets are illiquid assets that are often not traded but have value. In a previous article, this was called “human capital”. Often human capital is often overlooked, but it reflects the present value of the owner’s expected return.
Liabilities located on the right side of the sheet should be treated equally. Mortgages, business loans and other property arrears are obvious obligations. In addition, business owners and practitioners should include their continuity goals, as liability is provided, and career professionals and non-business owners will include estimated retirement costs.
For example, if you want to maintain a certain standard of living after you leave your business or retire from a career, you create a certain responsibility that must be financed by assets located on the left side of the life balance. The desire to buy a holiday home, start another business, or fulfill a charitable commitment is also an implied commitment.
Think about the balance with the assets listed on the left and the liabilities on the right. Combined assets include home, retirement plans and family business. In total, they cost $ 2,000,000. To this we are going to add $ 800,000, the amount of money the owner expects to earn as business income. This increases the value of Total Assets to $ 2,800,000 /
In the Liabilities section, we list three common assets, including mortgages, college expenses, and estimated retirement expenses. In total, they amount to $ 1,800,000. This leaves $ 1,000,000 as discretionary wealth; an amount that a person can use at will, but it will affect their value, pension and even inheritance.
The use of a balance of life helps owners, professionals and others to place value (present value) on their implied assets (their projected income) as well as implying liabilities (retirement and other expenses). This information should compel owners to review all of their tangible and real assets, including the value of their business, to make sure they are on track to achieve their long-term goals.
 Wilcox, Jarrod, Jeffrey E. Horvitz and Dan diBartolomeo, 2006. Investment management for taxable private investors, Charlottesville, Virginia: CFA Institute Research Foundation.