Once upon a time, when I was working with a consulting company that billed its customers hourly for their time, its CTO offered up an amazing perspective on profitability for its team of consultants during a team meeting. He explained that when it came to generating profit to put back into the business and to fund increases in employee compensation and benefits, the company’s consultants needed to keep in mind that while the company leadership appreciated everyone’s hard work, it was important to ensure that they billed a full 40 hours a week because all of the company’s profit projections were based on a 40-hour billable week.
He went on to explain, approximately of course, that it was hours 1 to 37 for each week that covered the cost of the expenses, but it was hours 38, 39, and 40 that yielded the profits the leadership put back into the business, and for that reason, while consultants might feel that billing close to 40 hours a week was close enough, it was, in fact, actually not.
This lesson in hourly billing and profitability not only resonated with me when I heard it, but still does to this day, because it makes me think of the very same concept as it applies to personal finances as well. While most people would never look at it this way, their personal finances are very similar to the financial models this consulting business and its CTO were addressing that day.
Much like this consulting business, and any business for that matter, each of us as individuals also have expenses that when deducted from our income, yield either a profit or a loss. If you get paid hourly and only work 37 hours per week, but your expenses take up your full amount of pay, which you anticipated being for 40 hours per week, you actually are going to bring in less money than you need to cover your expenses. While this comparison is quite literal, the same holds true for however you are paid, be it hourly, salary, in lump sums as a consultant, or any other way.
The bottom line is that you should always know exactly what your expenses are and should always ensure that your income never falls below the amount of those expenses no matter what you do. In fact, you should always strive to ensure your expenses are as small of a percentage of your income as possible. You should view the difference between your expenses and your income as your profit, and without profit, you cannot reinvest in the things in life that you enjoy and that are important to you and your loved ones.
Your personal profits are the money you use to pay for things like vacations, education, luxuries, or whatever other experiences or items you and your loved ones enjoy. By looking at this money left over after paying your expenses as profit, you can very easily identify and dedicate your efforts in ways that increase that profit.
So, the next time you feel 37 hours is close enough, or spending just a little more than you earn is no big deal, remember that without profits, you will have nothing to reinvest in your life, and what is the point of all of that hard work if all you ever do is just cover your expenses or dig yourself deeper into debt?
Photo by Meditations via Pixabay
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