If you are running your own shop, your objective is to generate enough income to cover all of your expenses and leave yourself with a margin of profit with which you can grow the business.
If you are a working stiff, your objective is the same, (but different) to generate enough income to cover all your expenses and leave yourself with a margin of profit (savings) with which you can grow your nest egg.
Too often businessmen are frustrated with their poor performance and struggle to find ways to generate additional sales. Frequently this may lead to pushing high margin products and services on customers that don’t want them and don’t appreciate the pressure.
Too often, individuals lose hope that they can build their nest egg. They dream of increasing their incomes or pin their hopes on long shots like the lottery.
There is an easier way.
Business and individuals can benefit by applying the principles of lean management in their lives. Eliminating the wasteful activities and expenses can be more productive financially than increasing your sales or income.
Consider that businesses often use the percentage of net profit as a key indicator of health and wealth.
Earn $5,000 (after all expenses are paid) in net profit on $250,000 of sales and you have 2% net profit.
As an individual save $1,800 each year from your $45,000 per year job and you have a 4% savings rate.
Businesses waste money all the time. If you are the owner or an employee you have seen first hand as an associate stands doing nothing while waiting for supplies or information. This is money being wasted. You have seen money spent of flyers, shirts, tools, or supplies that have never been used. More money is being wasted.
If a business wastes $100 it comes directly from the net profit. If a business blew $100, how much in additional revenue is required to recover this wasted money?
A business has expenses to pay. Heat, light, power and employee salaries and benefits are just a few. To recover $100 it must first generate enough sales to have the funds to pay these expenses of running the business.
Determining the revenue needed can be calculated by dividing the $100 by the net profit of 2%, meaning it would require $5,000 in sales to have enough money to pay the heat, light, power, salaries, and other expenses leaving $100 remaining as net profit.
How much time, effort and energy is required to produce $5,000 in sales? How much time, effort and energy does it take to find $100 in savings? This reveals certainly that it is far easier to save a buck than to make a buck!
Can this apply to you personally?
If you suddenly developed a fetish with the local coffee house and their special brew and blew $100 on hot flavored water with steamed milk, how much in income is required to recover this $100?
Use the same calculation… $100 divided by your personal savings rate of 4% means that you need $2,500 in income to have enough money to pay your mortgage or rent, utilities, food, clothing, taxes etc. and be left with $100 for savings. Again, is it easier to increase your income by $2,500 or would it be easier to find a way to save $100 in expenses?
Quit smoking, quit drinking, stop eating the quart of Haagan Dazs every night. It doesn’t take but a few small changes in your life to have an impact on how much you save. That tool you’ve been eyeing? Do you want it or need it? Can your car last just a few more years?
There are hundreds of ways for businesses to lean their operation. There are dozens of ways you can lean your life. Invest in your future by being lean today.
In the words of Benjamin Franklin – “A penny saved is a penny earned. A pin a day is a groat per year. Save and have.”
To modernize this quote you might say… A penny saved is a penny earned. A small amount saved each day grows to a large amount each year. Save your money and you will have money.
This reminds me of another great saying but I don’t know who deserved credit…. “It’s not what you make, it’s what you keep”
Happy savings… ecourage your family, friends and neighbors to do the same. Do it for yourself and do it for your country!
