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What is Your Hobby Worth?

Bench Racing

by Ryan King

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That's a question which is just as important as the one I posed in the 11/19/17 Bench Racing post: What Are You Worth?

Not only is it important, but it's complicated.

However, while it is complicated, understanding the basis of its worth, isn't.

In business accounting there exists a measuring tool called a balance sheet. A balance sheet simply shows the value of a company on a given date. The way it is expressed is through a simple equation:

Assets = Liabilities + Owner's Equity

If you remember back to that 11/19/17 post, that equation is awfully similar to the one used to understand your net worth:

Assets – Liabilities = Net Worth

So, the balance sheet is similar to a net worth statement.

While personal budgeting uses single entry bookkeeping to achieve its goals, the balance sheet uses something called double entry bookkeeping, which is not really all that complicated once you understand how it works.

This post isn't about double entry bookkeeping, though. It's about understanding how to find the worth of your hobby, which is a critical part of understanding how the money you are using to fund it is being used. That, in turn, allows you to manage it.

In business, a balance sheet is basically broken down into three key areas: assets, liabilities, and owner's equity. If you follow the equation shown above, it means that the amount of debt you have outstanding for your hobby (liabilities), plus the amount you've invested in it (owner's equity) is equal to the value of the assets used by your hobby.

It's that simple.

This gets us down to the nitty gritty of the value to you in having a clear understanding of the worth of your hobby:

In order to have a clear understanding of your hobby's worth, it has to be financially separated from your own personal finances. Once you learn to do that, you can keep an eye on how much money you are putting towards your hobby, how that money is being allocated, and ultimately, how to manage it, because in order to manage something you have to be able to measure it and in order to measure the money, you need to be able to corral the financial resources used by your hobby, which allows you to make up one of the key financial management tools, the balance sheet.

Now, I realize I haven't explained how to create a balance sheet here, but that was never my point. That would take far more than a blog post to explain. My point was to provide a clear understanding of the importance of having one. It's critical to measuring your hobby and that is critical to managing it which is ultimately critical to your success.

If you want to understand more about balance sheets and the impact of financial management on an enterprise, you can check out Business Studies for Dummies, as well as Complete MBA for Dummies, and the Complete Idiot's Guide to MBA Basics. Each offers its own strengths and perspectives, and provide a easy-to-read glimpses into the entire gamut of business management.

Ryan

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