Business and specialized practice owners know they cannot effectively run their company without understanding its financial position. In the same way, when it comes to making a comprehensive wealth plan, they also need a framework to estimate their overall financial position.
A “Life Balance Sheet” provides a complete view of the owner’s assets, limitations and net-worth. Though similar to the more traditional balance sheet used to monitor their company, the Life Balance Sheet includes both real and implied assets and limitations.
The left side of the sheet lists the owner’s assets and includes the traditional financial assets (cash, stocks, bonds, different assets, etc.) and other tangible assets (real estate, precious metals, art collections, etc.). It also includes implied but expected assets.
Implied assets are non-liquid assets that are often non-tradable however have value. In a past article, this was referred to as, “Human Capital.” Though often overlooked, Human Capital represents the present value of the owner’s expected earnings.
limitations, on the right side of the sheet, should be viewed in the same manner. Mortgages, business loans and other debt secured by character are explicit limitations. Additionally, business and practice owners should include their series goals as an implied liability and career professionals and non-business owners will include the estimated costs of their retirement.
For example, if you want to continue a certain standard of living after leaving your business or retiring from your career you are creating an implied liability that must be funded by the assets on the left side of the Life Balance Sheet. Aspirations to buy a vacation home, start another business or fulfill a charitable commitment represent implied limitations in addition.
Think about a Balance Sheet with Assets Listed on the left side and limitations on the right. The combined assets include a house, retirement plans, and the family business. Taken together, these are worth $2,000,000. To this we are going to add $800,000, the amount of money the owner expects to earn as income from the business. This increases the value of the Total Assets to $2,800.000/
Under limitations we will list three shared assets including a mortgage, college expenses and estimated retirement costs. These total $1,800,000. This leaves $1,000,000 as Discretioinary Wealth; an amount the person can use as he/she desires, but that will make a signiticant impact on their net worth, their retirement, already their legacy.
Using the Life Balance Sheet helps owners, professionals and others place a value (present value) on their implied assets (their projected earnings) in addition as their implied limitations (retirement and other costs). This information should cause owners to review all their tangible and real assets – including the value of their business – to make certain they are on track to meet their long-term goals.
 Wilcox, Jarrod, Jeffrey E. Horvitz and Dan diBartolomeo, 2006. Investment Management for Taxable Private Investors, Charlottsville, VA: Research Foundation of CFA Institute.