Author: Jake Pretorius
Increase your profit by mastering this little known economic principle...
Parkinson's Law says is that if there's an available resource, it will be used up.
For example with my uni assignments, if I've got three weeks to complete a uni assignment, I'll take the three weeks to complete the uni assignment.
Realistically though, I'll probably do nothing for the first two and a half weeks and then smash out the assignment in the last two and a half days but I'll use up that entire period of time to work on that assignment.
This is the same sort of thing where money is involved.
That's why we say that the traditional profit formula doesn't really work because if your revenues are up here and your expenses are down here, Parkinson's Law says that that available resource of revenue will be used up.
Ultimately you'll start finding more expenses to occur to match your revenues.
I mean, that's found in personal life as well.
People say all the time, you live to your means. If you're earning $80,000 a year, you'll live a lifestyle that meets the $80,000 a year that you're earning.
We believe that Parkinson's Law plays a big part in how businesses are run and how profits are made.
Instead of combating this, I guess, natural tendency to use up everything that we have available to us, the Cash Rich Business method teaches us to better manage our animal urges.
One of the main ways that we do that is by having business owners operate out of five key accounts, which is your IN account, which just means money comes into that account and that's from where you distribute it.
Then throughout the month you distribute it to four other accounts which are essentially your four main purposes for money in a business.
First being profit, then owner's pay, then tax and finally operational expenses.
That's the Cash Rich Business method.
That's how it works, that's our thinking behind it.
Once we've gone through that workshop, we get to say to the business owners, okay, what we want you to implement is to set up your profit account, that's the number one thing and then the next big step is to cut ten percent of the operational expenses.
We call this trimming the fat.
That's our sort of key term.
The reason is that in order to find all the different fluctuations and stuff that's going to be happening in your business by applying the Cash Rich Business method to your business, you're going to need some room to move.
As a rule of thumb, we've said ten percent needs to go. This is the time when business owners often say, look I need money to make money. This isn't going to work. I need to spend what I'm spending, every dollar is accounted for.
We've found time and time again that it really just isn't the case always and so we give them two sort of key principles to, okay, how are we going to either cut your expenses entirely, just get rid of what you're spending or negotiate it down?
There are two rules to cutting expenses:
1. Cut everything that doesn't make you more efficient or keep your customers happy.
2. Negotiate everything else.
That's probably one of the biggest feedback that we get from people that have gone through the workshop, is them saying, hey look, I was applying this the other day and I went to Optus or I went to Telstra, or I went to this provider with the competitor's quote and they were able to match it or they were able to cut costs.
Simple things like that can save your business hundreds throughout the year!
Got a burning question about how to make your business Cash Rich?