Get the Math Right
It is astonishing how many individuals either struggle with or overlook basic math concerning their business and personal lives. Here are a few tips:
- Revenues minus expenses equal profit, and a business can’t survive in the long term without profit unless it has a subsidy.
- You can’t sell something for less than it costs to make/deliver it.
- Not all products and services are created equal. Ensure that your internal investments align with the realities of the external market.
- Cash inflows must exceed outflows, or a strategy must be in place to cover the shortfall (and this issue should only be a short-term problem, lasting 120 days or less).
- The status of your work backlog and sales pipeline is a good indicator of your future.
- If your Days in Accounts Receivable exceed your Days in Accounts Payable, you are creating a cash flow problem.
- Your cost of capital should be less than the return on your investment opportunity.
- Using debt to conceal poor management decisions or flaws in a business model is never a good strategy.
- Minimize overhead expenses relative to revenue results.
- Ensure adequate investment in revenue-generating positions (e.g., sales and marketing) to leverage opportunities.
- Your level of productivity should always exceed the rate of inflation.
- Don’t pay yourself more than the business can afford.
- Maintain sufficient capital in the business to handle short-term emergencies and capitalize on unforeseen opportunities.
- The compound value of interest over time is a wonderful thing.
- Businesses and families should have an operating budget and live within their means.
- Have money set aside for emergencies because they do happen.
- If you don’t invest and save for your future, you may not have enough money to live on when needed.
Hope is never a good strategy when it comes to your business or
personal finances. Understanding the core math that impacts your decisions and actions is a prerequisite for a successful life.
