In this video, I am going to give you a financial slap to the face. Watch now!
VIDEO SUMMARY
Last week we talked about the profit equation. This week, I want to focus on the concept of cost. When you talk about cost, what people really need is a financial slap to the face.
Just to be clear, I am not advocating violence. Please do not go around slapping the people you work with. We are just having some fun. The point is to shake up your mentality about cost. This is something a lot of people do not think about and they just get into a subconscious rhythm of spending money. If that describes you, you need a slap to the face to snap out of it.
I am going to go through three main ideas, you should be thinking about when it comes to cost.
- Buying something is NOT progress
I want you to think about what happens when you buy something. Really think about that process. It all starts with a goal. We all have goals we are trying to achieve. In business, your goal is typically to make more profit. So we sit down and think about the easiest way to make progress toward our goal. Most people immediately jump to “let me buy something.”
Why does this happen? Purchasing is so attractive because it gives you immediate gratification. You can walk into a store, buy something, and say “look at this. I am making progress towards my goal. It was quick and easy.” You get a little boost that makes you feel good, like you are making progress.
That feeling is not necessarily true. Purchasing does not always result in progress. In fact, cost is taking away from profit, so you might be taking a step backwards. If you are going to become good at managing cost, you need to separate out in your mind the difference between buying something and making progress.
Let us go back to the start of your thought process. You started out with a goal. One of your options at this point is to go buy something. Buy you also have a second option. You could go do some hard work. Your choice is between instant gratification, or a lot of time and energy. I think you can see why it is attractive for people to buy so much stuff. I am saying “knock it off.” A lot of the time, the smarter choice is to buy nothing and just do the hard work.
The problem is that people do not stop to think and make this decision. When you are reaching into your pocket to buy something, you are making that critical decision between buying something and doing the work yourself. Sometimes it makes sense to buy things. But what I find happens in the real world is that people do not even stop to think about it. They just buy the easy solution, and it is not always the best alternative.
- Only buy what you USE
This is the second major problem I see happen with cost. People buy things they never end up using. Take a look around you right now. Is there any of the stuff around you that you have not used in the last year. If there is something you have not used in the last 365 days, you probably could have gotten away with not buying that item.
What is happening here is that people buy things without asking the question, “Is this something I am sure I am going to use.” If you are not certain of the answer… do not buy it.
Just for clarification, there are some things that you buy that you hope you never use. For instance, insurance or a fire extinguisher. But that is not where we are talking about. That is a small portion of what people buy. I am talking about items people should use and do not. That shows they did not stop and think before they made that purchase.
Think about what is in your garage. Is your garage full of stuff you do not use? That is probably items you should not have bought. Do you know what is in my garage? Nothing. I have my car and nothing else. That mentality carries over to your business. Do you really need the stuff you are buying. I will tell you that I walk into businesses all the time, and I look around and there is stuff everywhere sitting on shelves that they probably never use.
You really need to understand the impact of this. If you take all that unused stuff and add it together, that is money that would go straight to your bottom line. That is profit sitting up on your shelves not being used.
- Your budget starts from ZERO
This is a big problem for companies. Most companies go through a budget process where they look at their spending from last year and that becomes the starting point for next year’s budget. They say, “Let us continue what we did last year, and by the way, here are more things I want to buy on top of that.” I encourage people to use a different approach. Your budget starts from zero.
You might think I am joking, but I am not. What would you do if your department’s purchasing budget is zero dollars. I am betting you would get pretty creative on finding free solutions to accomplish your goals. For starters, look around at all the stuff you have around you. Maybe you can use all the stuff you have already bought rather than buying new stuff.
Your starting assumption is zero, and then you build the budget from the bottom up. The only things that should be going into your budget are things you absolutely need. And you should never buy something just because you bought it the previous year. It should be a thoughtful decision every year.
CONCLUSION
So to recap, when you buy something, remember these three ideas:
- Buying something is NOT progress
- Only buy what you USE
- Your budget starts from ZERO
These three ideas are some of the main differences between a business leader and a worker. As a business leader, you usually have insight into the profit equation for your organization. So it is easier for you to understand the connection between cost and profit. A lot of workers do not have insight into how their purchases are impacting profit.
A lot of times business leaders make this worse. If you are the type of business leader that just hands out tasks to people, the easiest way for them to accomplish those tasks is to just go out and buy stuff. One of your responsibilities as a business leader is to help your workers see the connection between what they are buying and the profit equation.
The general theme here is to be thoughtful about your costs. They are driving your profitability. Every time you spend a dollar, stop and think about what you are doing. When you stop and think, that allows you to make meaningful purchases for your organization.
Leave a comment down below letting me know what you think!
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Neither Zach De Gregorio or Wolves and Finance Inc. shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.