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Making the Sea Change

Making the Sea Change – August 2005 Newsletter

This month’s newsletter article is about managing money when you’re starting out and is inspired by a market friend of mine who has taken the leap with her own business.
The trick with money when you have a small business is to look after it carefully and know where it is.

You need to know what your weekly expenses are and cover them. So I know what my rent is and what money I need to live on. I’ve also realised I need to put money aside for school holidays and trips to family in the country as my regular weekly allotment doesn’t cover these costs.
You need to know what money the business needs to develop products and services and what returns those costs are going to make for you. So I know I spend a certain amount weekly on beads, components and stationery (the Market Reward Card program) and that if I don’t maintain stock levels then my sales are down.

You need to have a view of what upcoming costs are ahead so you can save for them and be ready. For example the annual web hosting costs, public liability insurance, accountant fees, taxes etc. It is horrible feeling surprised by an annual or quarterly bill and having to scramble to get the money together for it. Instead looking ahead through the year and putting aside money weekly for them makes life much easier. A simple way to help map out costs is to use a calendar or diary and write in the annual, quarterly and monthly bills.
You also need a stash – a safety net fund kept in an account that has low costs (Credit Unions are great for that, so too are the high interest, low fee accounts like ING’s and Macquarie Bank’s Cash Management accounts). You need this stash for rainy days. For me rainy days are literal given I do markets but no matter what we do there are equivalents to rainy days. This stash needs to be able to give you breathing room so your rent/mortgage and weekly living costs are covered for 4 weeks at least. You achieve this by squirreling away money each week, even if it is $50, other weeks it can be more. The key is to build up this stash so you have the flexibility to handle slow weeks.

The overall aim of the business should include being able to create wealth for you – savings that cover your lifestyle costs for years. So what starts as a little stash will grow to be the basis of true wealth – a stash that earns interest and income that allows you to live off it and live the life you want. To do this you need to put money away each week and leave it alone until you need it. When you do use it you replace it as soon as possible and then build on it.
The value of having this stash is the security it offers. It takes away the fear and the turning tummy and it gives you confidence to keep on going. It is really hard to be creative when you’re stressed about money. When you can’t create then you can’t build up your business and create income. It becomes a vicious circle. But having the stash lets you be worry free and keep creating – believe me, it is much better. 🙂

So once you have your living expenses covered, your stash is growing, you’re investing in the business and your periodical bills are being looked after the next step is to make sure there are long term savings being created. The stash is short term savings and the medium term savings are for paying periodical bills. The long term savings become the foundations of your wealth, they give you sources for funding investments in businesses, property and shares. Your super is part of this long term savings plan but if you have a business your retirement investments need to perform better than super.
All of this is achieved by practicing daily good discipline in respecting your money and looking after your cashflow so you can pay your bills and build a stash.

Put away money every week. I now do this, even if it is only $20, the principle of the action is what matters.

Develop other sources of income that is only used for savings and investments and is not used in the daily/weekly payment of bills and living expenses. This income is saved so you can either develop another area of the business or put it into investments for your own personal use, say a holiday or paying off the mortgage more quickly.

The aim is to learn to live on one source of income and develop others for savings and investments. A source of income = where money comes from to you. Examples can include wholesale sales to shops (sales to other businesses B2-B2), internet sales, sales direct to customers (this can be further broken down also to how you do this), affiliate sales, mail order sales, royalty payments, referral payments and interest payments. There are as many ways to generate an income as your imagination will explore.

What is also key to success with managing your money is to realise the value of it building up on itself when you’re stashing, when you’re saving. It keeps building up, especially if you are using an interest bearing account and it is easy to get one paying more than 5% on every cent in the account. I get really annoyed with the leading consumer banks (Commonwealth, NAB, ANZ, Westpac etc) who have savings accounts offering 5%+ only on savings of over $20,000 in what they call cash management accounts and if you drop below their floor limit then you don’t get the full interest rate. They are relying on existing customers thinking this is a good deal and not looking around. Well they are dreadful products that fail their customers.

What you need to do is explore and find out what the alternative options are. Talk to an independent financial advisor (ie. one that IS NOT employed by the bank), a useful accountant, a friend within the banking industry to build on your financial education and get a better idea of the financial products available (bank accounts are products of the finance and banking industry).

Macquarie Bank, the Australian investment bank, developed the cash management trust (account) in the 1980’s and paid cash rate interest rates – the cash rate is the same rate that the Reserve Bank (RBA) has as the interest rate (so you know when the RBA puts up interest rates it means that mortgages go up but so to does the cash rate and you get more for your savings). Macquarie Bank has a very good range of investment and savings accounts (products), including the CMT (Cash Management Trust) but most require a minimum deposit of something like $5000.

Others to explore should be ING with their version of the cash management account as they have realised that there is a great big gaping hole in banking products for a decent savings account. ING pay the entire interest rate on every single cent in the account. I love it that they are making saving accounts accessible and with decent interest rates.

Of course there are others like Bank West and various credit unions offer great accounts too. So go exploring, go asking questions – what’s in it for you? A financial institution should be competing for the privilege of investing your money – not ripping you off with fees and tiered interest rates. If you have $20,000 to put in a savings account you should be getting more than 5% so educate yourself and empower yourself. (Can you tell I’m passionate about this? I get really annoyed when I’m in the bank and see what they offer with their “saving account” products.)

When you are looking at banking products ask yourself where the money is, what is in it for you and what’s in it for the bank/financial institution and what are their values towards you, the customers? For example investment banks approach customers as a means to form a partnership to make income together – they pay you for your money so they can use it to make money for both of you. Credit unions treat customers are members and they are in business to look after their members. Consumer banks (the Big 4) trust that their customers want a sense of trust with “their bank” and bank on customers not looking around for better products because they believe their customers don’t know how to and don’t know how.

So to be part of this you need to look about with interested eyes and explore. What are your costs, your budget on a weekly, monthly, quarterly and annual basis? What are your savings needs for short, medium and long term? What contribution to society do you want to make – scholarships, charity involvement etc. What are ways to generate income that can be used for all of this? How can you do this progressively, what steps do you need to take? Step one is asking and answering these questions. Step two is to start stashing!

If you want to be finding out more about all of this write a list of questions (even if it is only 2 questions long, that’s fine) and then go to the library or bookshop and go through the financial section looking for a book that seems to answer those questions then read it (reading it is the key really, not just buying it). If in doubt, ask for help from the staff. A really good bookshop in town is the Dymocks on the corner of Hunter and Pitt Streets, Sydney. Their staff are really good and helpful.

You don’t have to be scared about money. A sense of ownership and control of money gives you freedom. You get there step by step so go for it, don’t bother being spooked, just do it. 🙂

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