Companies go into business, manage their expenses and create profit. All companies operate the same way across the world. And, it is no different for you. Think of yourself as your own business; to make your business a success, you need to take a look at the following:
1. Burn rates
Most start-up companies concern themselves with ‘survival’. Their initial funding is spent to get the business up and running. The rate at which a new company’s funding is being spent is referred to as the ‘burn rate’. This tracks how much money you are burning!
Apply this concept to your own finances. If you ‘burn’ your money too fast, you will have no savings. That is, if you net Rs 150,000 per year and spend Rs 155,000, you are operating at a Rs 5,000 loss. How long could you possibly last if you are burning Rs 5,000 in cash each year? Not very long!
To get your personal goals on track, you need to sink your money into investments and cut your burn rate.
2. Profit margin
In the corporate world, there are two types of profits — gross and net. Gross profit is your profit before taxes, while net profit is the after-tax figure. And, net profit is what matters to your life.
So, what’s your net profit?
Step 1: Note down your income each month after the tax has been deducted.
Step 2: Note down your expenses including EMI/rent, car payments, credit cards, dinners, movies, etc.
Step 3: Subtract the expenses from the income.
Say, you net Rs 150,000 per year and you spend Rs 120,000 per year. That leaves you with Rs 30,000 in net profits.
————– x 100 = your profit margin
That is, Rs 30000/150,000 = 20 per cent is your profit margin
But remember, having money left at the end of the month doesn’t mean your business is in good shape. To evaluate your situation further look at how much you actually, need.
For example: You maybe saving 20 per cent of your income every month. But if you want to buy a house, the downpayment of which is more than your annual income, then this may just not be enough.
3. How much is enough?
A few questions you need to ask yourself —
Are you happy with the net profit number?
Is it enough?
Is that the number you had hoped for and planned for?
Will your business survive on that number?
On the corporate side, 20 per cent gross profit margin is not impressive. The greater the profit margin, the more attractive the company is. So, decide if your profit margin is good enough because only you know how much money you require to turn your goals into reality.
4. Aim for more
Reduce your expenses, if your profit margin doesn’t provide enough revenue to fund your retirement savings. If your profit margin is adequate, increasing it will add a cushion to your plan.
Corporations have more concerns than just paying bills and breaking even. Similarly, it won’t ever be enough to achieve just your end goal. So, focus on the numbers, and approach the endeavor in the same way that a company approaches its business. If it were a business your board of directors would ask you ‘Are the assets in good shape’, ‘Are you providing for depreciation’, etc. Here you need to ask yourself ‘Are you adequately insured’, ‘Do you need to join a gym’ and so on. So, remember to invest in two things to improve your profit margin — your health and quality education.
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