For employees, the concept is simple. Set aside a fixed percentage of your net income every payday without fail in an “investment account”. (Of course, you can’t really pay yourself first – your employer ensures you pay the government first so we are dealing with what’s left after that).
The balance left after your saving commitment is then used to cover all your other living expenses - car/house loan repayments, holidays, entertainment, education as well as food, utilities, transport, insurances etc.
Does that sound impossible? That is a common reaction but for those who actually commit to the process, the results are remarkable.
The reason it does work is the change of focus that becomes essential for the process to work. Instead of planning to save “whatever’s left” after you’ve finished spending, you are now forced to plan your spending to fit in the limited resources available after you have set aside your savings.
Of course, making the money you set aside work for you is also an important part of the process.
What would happen if we applied the same process to our businesses?
The normal calculation for a business profit is Income less Expenses (which occasionally would include owner’s salaries) equals the Profit of the business.
Unfortunately, for many small businesses Income less Expenses is a negative number and often Expenses don’t even include a reasonable salary for the time the owners invest in the business. It may be that this result is inevitable however we look at the numbers in which case, why does the business exist? But that’s too big a question to be addressed here!
So, suppose we changed the above calculation to read Income less Profit equals Expenses (including owner’s salaries). Would this change how you thought about and ran your business?
Automatically you are now focussed on controlling expenses by making sure that the business receives the best value for dollars spent, “extravagancies” would be eliminated, creative solutions would be found to meet targets efficiently and the viability of the business in the long-term would be assured.
How do you decide how much profit to set aside? The easiest starting point would be 1% more than the current profit and then increase it by 1% every year. Of course, if current profit is negative you need a better plan but set a small (positive) target and work to make that happen.
So, for small business owners and employees, radically changing the way you spend income to ensure that your future is provided for first will make a profound difference in the way you view expenses (business and private) and help guarantee that, at the end of the day, you have something substantial to show for your effort.