Have you ever heard of ‘Parkinsons Law’?
This law was discovered in the 1950’s by Historian Cyril Parkinson.
The Law states - The amount of work required to complete a task is relative to the amount of time available.
I.e. Give someone 2 days to write a report and they will take 2 days, Give a week to complete the same report and the whole week will be used for completion.
In business, many owners apply this law to profits. In this scenario, Time is replaced with money.
In the past, if you gave me £1000 to append on a project, I’d spend it, tell me I had 10K to spend and I’d spend that as well on the same project.
So it seems simple, be conscious of Parkinson’s Law and make a concerted effort to keep the costs down?
There is another problem though, people, Myself very much included tend to focus on what we see first. Show us a list and we usually remember the top of the list over the rest.
In business, profit starts with sales. I like many have focussed way too hard on just sales in the past. I did this because it was the first thing I saw. I needed sales. I wanted sales.
I went all out to get sales because they would give me profit.
The trick I learned was the same as when I got myself out of debt. I started to deduct my profit from my sales and get used to operating without needing the extra money.
In one of my businesses, I wanted 11% profit. So every time I got a sale I transferred 11% to an account that was set up to hold cash only.
No direct debits came out of this account. The money sat there and built up. Doing this did a few things for me.
It gave me less of a sense of security. My old way of paying everything into one account saw my cash build in one place. As the account grew so did my confidence to spend it. I had a large account and as in Parkinson’s Law where time was replaced with Money, I spent it all.
Nowadays I like a main account and sub-accounts and here is why.
When I transfer money into my sub-accounts the money is set aside. The main operating account holds less cash. This helps me because, there is less money to spend, the money in the sub-accounts is held for - Paying myself, paying tax, Company profits.
Now a lot will say, what is the point when you log on to your bank you will see the profit account increasing. It will still tempt you to spend the money. To combat this I have my sub-accounts in a separate bank. This way when I log on to my main account I don’t see the sub-accounts.
I am not tempted.
This strategy also teaches me to do more with less. I have less money in my operating account so I have to be more creative. I look for efficiency and analyse what we do best for our customers. I put systems in to get better at what we do.
So to summarise, the best way to make sure your company makes a profit is to take it first. Pay it into a separate account and do this regularly. If you want a 25% profit but have to many debts to take the whole 25% start with something smaller, even if It is just 1% do that.
Get used to the routing and existing on less money, every quarter increase the 1% slightly and go again until you can up it. Keep turning the dial-up till you get to the 25%.
You will train yourself to get into a routine, You will exist on less money and become more creative whilst not being tempted to spend the whole pot every month as I did in the past.
This strategy really does work and promotes great habits. For more information please email me : [email protected]