Man stacking up his pennies

Embracing Money

People’s views about money tend to be quite polarized. There are those who believe money is the root of all evil and similar negative frames, but what I want to talk about today is a few slightly different things.

What I’ve noticed, in my field of coaching and belonging to a group of fairly high performing people, is seeing how things change for them over time. One of the things people battle with is their money values lag their success, and that’s a really important point.

What I mean by that is when you don’t have money you pay attention to every penny and not surprisingly you tend to be more penny-wise and perhaps pound foolish. But the problem is that as your wealth increases and you still carefully count all the pennies, what actually happens is that you’re still making decisions based on a cost and time basis rather than understanding properly the value of the opportunity.

It’s said that wealthy people spend money to save time and poor people spend time in order to save money. If you’re taking a poor person’s viewpoint in a money rich or a money surplus situation, the chances are you’re going to be making a decision that’s not really optimal for the situation that you’re in.

The Values Lag

I’ve worked in business and on businesses for well over 30 years now, and I’ve never known a business that’s been able to save its way to growth. You can, by all means, cut unnecessary costs, but too often this is done bluntly and you end up cutting the meat as well as the fat.

At the same time, you make people fearful so they don’t reach for things, they don’t risk things, and because they don’t risk things they don’t find opportunities and you end up in an organization which is logically justified for how well it’s run because they’ve taken care of the cost.

No one’s actually thought about why it isn’t growing. It isn’t growing because it’s got a pennywise pound foolish culture. It’s a classic example of a values lag in money values, but on a big scale.

On a smaller scale, where you’ve got the so-called ‘solopreneurs’, somebody you know starts off self-employed and they never actually fulfil their potential because they’re too worried about the cost of things and they don’t really understand the value. if that’s you have a think about the value of the opportunity. The first obstacle you get to is that of having to take on another person. Of course, if you’re worried predominantly about the cost of that person you’ll never take that person on and therefore you’ll never benefit from their labour. They’ll never benefit from having a job with you and you won’t grow your business. Of course, this is the opposite of what you want!

Money is My Friend

It’s interesting how many people have an emotional relationship with money. One of the exercises I’ve done myself in the past, and with clients, is to consider money as your friend.

Put a chair next to you and imagine that money is sitting in that chair; what would you say to money about your friendship during your life to date? What would you say if money was your friend? How have you been a friend to money? Have you been a good friend, a faithful friend, an unfaithful friend, a fickle friend, or have you actually not been a friend at all? Have you treated money with disdain?

While you do that, a partner can make notes for you so that you capture this stream of consciousness, and then you go and sit in the money chair and you imagine that—you being money now—money is talking to you about how you are as a friend to money. So you’re reversing your position and giving yourself a completely different perspective on the same problem. It’s absolutely amazing what comes out when people do this and it’s a very cathartic experience for a lot of people. It can unblock some quite interesting problems.

A story that may help was doing that exercise with a young entrepreneur. A very successful young man, but big hang-ups around money because despite his mother working very hard throughout her life she never had any money. It was interesting the degree of anger, frustration, guilt, all kinds of emotions he had around money because of the experience of his mother. Then being able to resolve that and understand by having a healthy attitude himself he would be able to take care of his mother and make sure that she was provided for in her old age and therefore resolving a pretty significant problem.

Money Illiteracy

So another problem with money is that a lot of people don’t understand it. They don’t understand numbers. It’s said a lot of people start their own business because they could never get a job. The funny side of that is people tend to run away from money; they never actually confront issues. If I think about some of the clients I’ve worked with, some of them in quite big businesses, where they’ve never properly costed a contract, for example, it’s all done by the seat of their pants. They don’t really understand their own financial numbers. They don’t know their gross profit and if their gross profit is big enough to give them a net profit when the overheads are paid.

So it’s really important to be fluent in your own numbers in your own business so that you can make informed decisions. With one client we realized that the owner had bought way too much in terms of equipment and tools for that business. There was probably a little bit of ego in play there, wanting to have nice shiny objects. But then there were the financial costs of carrying that equipment and it not being used. By liquidating those assets, by selling that equipment, putting that money back on the balance sheet and not having the cash drain from payment plans and higher purchase that business is in a much better position financially. Way more than the client has envisaged because he hasn’t yet got the number fluency to see how something, which appears to be small, compounds to something big over time.

It really is that simple. Our brains are not good at doing compound calculations. We can do linear equations, you know, one plus one equals two, but we can’t very easily do one plus one equals three. Money acts with that compounding effect. Think about not having to pay that interest, not doing those repayments, the penalty of not having that cash but having an overdraft, all of these things were holding that business back.  When they sold that equipment, put that money back into the business and stopped the expenses going out, suddenly the benefit of those changes compounding over time makes a big difference to the overall financial results of that business.

Somebody similar had come to me with a challenge. They were successful in their own right— technically in their field — but not having the profit to show for it. What we realized at the heart of it was a desire to impress other people. When this person was able to release that need and instead focus on looking after themselves—and the family and the team in the business—they suddenly made much, much better decisions, and over the course of 12 months ended up with 10 times more profit, because they had a different attitude towards money.

Working on your money values can have an absolutely huge impact on the security of your team, the security of your business premises and obviously the lifestyle of you, the owner and your family.

The 4 Break-Even Points

So when I’m starting out on the money journey with clients, one of the first things I get people to do is to work out their break-even points.

For business owners, the first breakeven point is the point at which your business can pay its own bills? How much revenue must the business bring in so that all the bills and taxes get paid? Most business owners do not know this number. BTW, you haven’t been paid, yourself, yet, but that brings us to the second breakeven point.

The second break-even point is your family break-even point. This is looking at all the standing orders and direct debits that go out of your bank account every single month, including food, such that at the end of the month it is the money you’ve spent to survive. You’ve all survived but you haven’t gone on holiday or bought new clothes or a new car or a new this or a new that, you’ve just survived. That’s the family break-even point so we have to bring in at least as much money as that after-tax to survive. That’s point number two, and again, most people don’t know what that is. So it’s very useful to know that number.

Again, you need to know the business revenue number that corresponds to the business paying its own bills and it paying yours. At this point, the business is surviving and so are you. The problem is that you didn’t go into business just to survive, you wanted to prosper and enjoy a lifestyle.

The third break-even point is your lifestyle break-even point. If you think about holidays, the car needing to be replaced at some point, the kids need school uniforms and if we weren’t in lockdown maybe go out to restaurants, cinema, etc, all things that cost money. Most people do not know the number which corresponds to their lifestyle expenditure. Think of it as an average monthly budget, tax paid.

Next, we go back to the business to calculate what corporation tax and PAYE taxes need to be paid to give you that lifestyle income? This revenue number is the third breakeven point, the point at which your business delivers the lifestyle you need.

The fourth breakeven point is your profit break-even point. It’s thinking about the profit targets you want to hit, to properly grow the business beyond just taking care of yourself and your family.

When I talk to people about business most of them haven’t worked these four numbers out. They’ve sort of got an intuitive feel but they actually can’t tell me the number. Of course, when you know the number you can focus much more clearly on what you want and it’s that which starts to make a difference. Very soon you’ll see the impact of your better financial decisions, on the financial health of your business.

Pimping Your Life

The last point I want to make about money is one I picked up from Keith Cunningham, the rich dad, in Rich Dad, Poor Dad. Keith talks about pimping your business and pimping your life.

Imagine that you need a new laptop, you could be a Mac fan or a Windows fan, doesn’t matter, which but you need a new one. You’ve got your eye on that nice shiny object and then Keith pipes up and says “yeah okay you’re looking at that nice shiny laptop”, that’s two

and a half thousand pounds, it’s the all singing all dancing ultra-fast ultra-light fantastic thing. He says, “but a basic computer would only cost you £250 which is one-tenth of the price of the super-duper one”. So he asks “tell me how the expensive one’s going to make you ten times as much money?”

Of course, it isn’t, is it? it’s just our egos being fooled into going for something more than we need. If you think about it, how many areas in your life are you doing that? I’m not saying go for the absolute cheapest every time. Keith just said go for what makes you the most money. So if you know that the cheap one will break down within a few months and you need to buy another one then obviously buying one that costs twice as much, that lasts twice as long is going to be a better economy, because you have less disruption. Generally speaking, we tend to be too free in going for what we want rather than what we actually need.

We could then take the money that we saved and invest it to make our business stronger.

For more information on how I can help you find true value in your investment, get in touch with me.

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