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.