Wether you are starting something new and you are your first employee or just having a day job and managing your finances, viewing yourself as a business will help you get a new perspective on your performance.
I intentionally didn’t use the word start-up. As 37signals say “startups are companies where your spend other people’s money while trying to understand if your idea is profitable or not”. You, personally, are not a start-up unless you are living with your parents and they fund all of your ventures.
What are new businesses driven by? If they are self funded — profit. If they want to stay afloat they have to be profitable.
What is profit?
Your revenue – your expenses = your profit.
Many people brag about how big their salaray is, but only a few brag about the profit they have.
As a person working full time in a day job or for yourself you are the one who generates all of the expenses.
Lets do a simple math:
You earn $2000 a month, but you spend $1900. The result is $100. The profit margin is too low here.
Should that be a problem? Yes and no. It depends how fast you want to grow and do you want to feel secure in the long term.
Many people would say that if you can sustain yourself, i.e. spend less than you earn everything is fine. But this is not enough.
Your revenue – your expenses = your profit.
Going back to the metaphor of the new business. You as the owner, CEO and first employee of the company named “You” should be interested in seeing your business grow. This can’t happen without enough pofit that you can use to expand.
What do you want to be profitable at all if you only need to cover your expenses (entertainment, shopping, gadgeds, trips, food and accomodation)? If you treat yourself as a business you will realize that you should be growing. Everything in nature is either growing or dying. You stall and you die.
How do you grow then? Is it considered growth that you bought yourself new pair of jeans and a top-notch gadget this month? I don’t think so. These are expenses.
Think of all the money that goes out of your pocket monthly. Will it help you grow or you bought the stuff because you needed some kind of satisfaction?
Reducing your expenses will leave you with a bigger profit margin at the end of the month. How am I going to use that profit?
Well, this profit is money that can be invested. Invested in you. Don’t get me wrong with what I mean by “invested”. New jeans are not an investment unless they directly help you increase your profit next month.
In one of his astoundingly useful audio programmes, Anthony Robins proposes the bucket system of money management. You can take your profit and split it between three buckets: security, growth and dreams.
Let’s say you’ve managed to increase your monthly “profit” and it went from $100(from the previous example) to $400 by cutting expenses or receiving a promotion. Most people will find something new to buy with those freshly acquired funds. But you, following the bucket system may decide that you could do the following:
Take 50% of your profit and put it in your security bucket. This is money for the days when you won’t have any revenue coming in. Take the rest 50% and split them in half into growth and dreams buckets. The growth bucket is money for investing: hiring/outsourcing your work, buying a new tool that will take your game to the next level and so on.
The dreams bucket is where you pile up your money for all your trips, nice-to-have stuff, gadgets and so on.
Splitting your profit this way you will have a stream of savings each month going to the buckets which are a nice fall back system when you need resources. This kind of finance management will make sure that you don’t miss saving money for the down times and will also help you grow.
Based on how risky you are you will be inclined to shift that security bucket percentage up or down. What are your goals to feel secure? For some people it is having 6 months worth of saving in their bucket, for others it is two years. Thing how are you going to achieve this and adjust to your liking.
You revenue is not your profit. You may earn $700/mo and still have a profit of $300. It is all about your goals(and how you spend your cash). Think about it. Do you want to stay in business or you want to burn brightly like a firework(no offense Katy Perry)?