I read a report today that said we should have a cash reserve of about 6 months spending, “just in case”.
Money is a resource, a tool that makes things happen. Putting it in the bank is the same as giving it to the bank to let them do with it what they want to do. I am not saying we shouldn’t be putting some money to one side “just in case”, but I would rather the money is working for you, not someone else.
So how do you get money to work for you? There are many ways, depending on how risk averse you are, how quickly you want access to it, and how long you are prepared to invest it. Putting it in the bank represents the lowest risk, and the lowest return, investing it in stocks and shares is high risk, potentially high return. So what is in the middle? As a self employed person, I am always thinking of ways to improve my business and will invest in things that make me better. This might mean training, courses, attending meetings, or simply spending time with those who have wisdom to share.
By being better at what I do, I hope that the chances of needing a cash sum “just in case” are reduced.
It’s nice to know that there is money in the bank, but I can’t take it with me, and I would rather use it wisely while I can.
I was helping a client today to prepare a budget. Due to the kind of work they do, we spent a bit of time talking about how much something costs, and how much something is worth. Let’s call the first it’s cost, the second it’s value.
When working out how much to charge for something, do you start with its cost, or its value?
From a customer’s perspective, they are interested in value for money, so your question should be whether there is enough of a difference between what they pay (Value) and what you spent on it (Cost). Assuming you sell for more than you paid, you make a profit. The eternal question is whether it is enough profit. And how much is enough?
It is a curiously English attitude that says we should “only” make a certain profit margin. I speak with many business owners who feel that to make “too much profit” is wrong. Some feel uncomfortable with making “too much profit”. But how much is too much?
I would encourage you to charge as much as you can; after all, if the customer is buying then they must feel they are getting value for money. Competition is the best gauge to what the market is prepared to pay.
But what if there is no competition – is there a limit to your profit margin?
I was late arriving for a meeting a couple of weeks ago. I needed to park in a metered space, and pay with coins. I hadn’t got enough change to cover the time I needed to pay for. Trying to keep calm, I started to look around for somewhere to get change for a £10 note. The concierge of a local hotel, realising my predicament gave me a £1 coin, enough to enable me to park and make my meeting with seconds to spare.
Since then, I have given away £1 coins three times to complete strangers in a similar situation to myself. I have also found myself thinking more about giving more away than I might usually do while talking to potential clients.
Something in the actions of the concierge has encouraged me to become more generous. At the same time, I have seen an increase in the amount of goodwill I have received. By being more open and giving, I have received more. More information, more support, and, ultimately more business.
In today’s cut and thrust world, it is easy to become focussed on ourselves and our own interests. It is harder to collaborate than act unilaterally, harder to give than receive, and harder to be open than keep your own counsel.
The evidence I have seen in the last couple of weeks suggests that the effort is well worth while. At worst, you might be out of pocket by £1, is that so bad considering the potential benefit?