by Tom Grandy
Let’s assume it’s the 1950s. During the ‘50s, few people had, or used, credit cards. Purchasing things back then was based on a pretty simple concept – if you didn’t have the money, you didn’t buy it. Sounds a little un-American to today’s generation, but it had one outstanding benefit: people, in general, were not deeply in debt.
Fast forward to the summer of 2016. I am on a working vacation in Myrtle Beach, SC and I have a wife whose hobby is shopping. No, she does not spend money just to be spending it; but with three daughters, three sons-in-law, and nine grandchildren she is always scanning the horizon for great buys. Over the past several days we have gone to several shopping areas with no intention of buying anything. But, as expected, we now have bags of the stuff we had no intention of buying. The principle is pretty simple. If we had not seen the item, we would not have purchased it. In other words “Out of sight, out of mind.” If you don’t see it, you won’t buy it.
That same principle applies to spending money in your business, “Out of sight, out of mind.” Let’s look at a few areas where this principle applies. The following suggestions may even limit your spending a bit, or at least reduce your indebtedness.
It is so easy to spend money using credit cards. However, paying off the balance at the end of the month can be more difficult. I understand that principle as I accumulated quite a bit of credit card debt during my early years in business. It took several years, but I found a solution. I have set up a “liabilities” savings account that I can access online. Each time I use the credit card, I simply enter the amount into QuickBooks as a bill to pay, then transfer the money out of my business account to the online liability account. That process continues throughout the month. When the credit card bill arrives, all the money I owe is sitting in my liability account. I simply transfer the money from the liability account back into the general business account, and pay the bill. Since the money was NOT sitting in my business account, where I would have been tempted to spend it, it was “out of sight, out of mind.”
The same principle that applied to my credit card spending also applies to paying your suppliers for materials, parts, and equipment. When you get the 25-50% deposit for the job (you do get a deposit in this range, right?) don’t spend it all. If you get a $1500 deposit, take the material and equipment cost of the job (perhaps it’s $1100) and transfer it to a liability account or open a separate account just for your suppliers. If you do that throughout the month, an amazing thing happens – you will be able to pay your distributors on time. That has some great benefits. If your supplier offers a discount for paying on time, you will be able to take advantage of it. Also, the name of the game for distributors is cash flow. The more money that comes in, the more stuff they can put on the shelf. Also be aware that less than 15% of contractors pay on time each month. If you pay on time, that places your company in a unique position with your supplier. You now have negotiating power that other companies don’t have. Try it, you’ll like it. Again the principle is simple. “Out of sign, out of mind.”
This one is easy, and fun. Simply pick a dollar figure to put into savings each week. It doesn’t have to be a large figure, so let’s pick $200. Now for the easy part. Have a short meeting with your office manager or whoever handles your checkbook. Tell them to take $200 out of your business checkbook each week and deposit it into a savings account or mutual fund. Since you will never see the money it really is “out of sight, out of mind.” Now for the fun part. By this time next year you will have accumulated over $10,000 plus growth and you will never miss the money!
Paying Off Debt
If you follow Dave Ramsey you are familiar with the process of the debt snowball for paying off multiple debts. Let’s say you have three debts:
• Debt #1 has a payment of $400/month and is scheduled to be paid off in six months.
• Debt #2 is $350/month and you owe $3,500.
• Debt #3 is $550/month and you owe $8,000.
As soon a Debt #1 is paid off apply the $400 to Debt #2. You are now paying $750/month on Debt #2 and it will now be paid off very quickly. When Debt #2 is paid off apply it all the debt payment funds to Debt #3. You are now paying $1,300/month on Debt #3 and guess what, it will be paid off in no time. Since you never saw the extra money when the first two debts were paid off it was again, “Out of sight, out of mind.” The best part is that you are now debt free AND you have an additional $1,300 going to the bottom line each month. That is an additional $15,600 in profit each year!
Payroll Tax Account
How many times have you borrowed from your payroll tax money sincerely thinking you would pay it back really soon … but you didn’t. Don’t mess with Uncle Sam because he doesn’t play fair. Failure to pay on time WILL incur penalty and interest and, if not paid, Sam will take your house, your car, and all you have. There is, however, a solution.
Again, create another online payroll account. At the end of each pay period, transfer 100% of the employees’ gross wages into that account PLUS the company-matching taxes (social security and Medicare and state and federal unemployment dollars). Once all the money has been transferred to your new online payroll account write your payroll checks out of that account. What’s left in the account? All the employees’ withholding taxes and all the company matching taxes. Again, “out of sight, out of mind.”
I encourage you to try at least one of the above suggestions. When your do, share the results with your elderly parents who grew up in the 1950s, and watch the smile come across their faces.