Most of us have experienced the childhood thrill of having a bucket full of candy after going trick or treating on Halloween. It is so easy to stuff yourself full of candy at the beginning. There’s a seemingly endless supply of candy at your fingertips, after all! But time goes on and eventually, you realize that you can see the bottom of your bucket. So you slow your candy consumption. Maybe you were making trades or sharing with your siblings – but not anymore. Your candy count is down to a precious few, and you have to stretch it as far as you can! You munch on a Kit Kat once every few days, but you save the best candies for last, trying to live as frugally as you can.
The truth is that we haven’t changed all that much since we were kids. We still base our actions and decisions off of how much or how little we feel that we have to work with. The more “candy” we see, the easier it is to consume. But when there’s not much left, we ration it out – in other words, we’re forced to be frugal.
This is an example of Parkinson’s Law, which states that humans will take full advantage of the resources they’re given. This applies to having a lot (we’ll eat until we feel sick) or a little (we’ll treat our candy as a precious resource).
Parkinson’s Law has a direct effect on the way that you view your interior design businesses’ money, and Profit First was developed with this principle in mind.
Here are two scenarios for what Parkinson’s Law can look like in your business’s finances:
Without Profit First
You start your business and open a bank account that all of your money flows in and out of. This one bank account may seem to work for a while – you’re starting a new business, after all, it’s not like you’re dealing with a ton of transactions and countless client payments.
But next thing you know, you do have a lot of payments coming in, and you’re not only paying for materials and subcontractors, you may even be paying a salary for new employees, handling expenses for office space, and so much more.
When you glance at your bank account you feel panicked, because you see a huge lump of money where all of your payments are coming from. This simultaneously can make you feel like you have no money, and way too much. This leads to spending more than you need to and not realizing it until it’s too late and you’ve lost sight of how much money you owe, and to who – whether vendors, contractors, or the government.
All you could see was a pile of cash, so you spent money that was earmarked for other things.
Using Profit First
You open separate accounts to manage cash for the different parts of your business: income, profit, operating expenses, mats and subs, owner’s pay, and owner’s tax. It may feel tedious for a while, as you shuffle money between accounts and don’t see much of a change. But you know that you’re just getting started, and eventually, all of those accounts become indispensable.
Putting Profit First in motion gives you a crystal clear picture of your interior design accounting of where every dollar in your business is going. And because you’ve calculated specific amounts for what money should go where, you have either the proper amount of money needed for those expenses, or you have less than you’d like. If that’s the case, you’ll be forced to run your business a bit (or a lot) more frugally than you’re used to, because the only money you can spend is what exists in your individual accounts.
This is where Parkinson’s Law really becomes practical and invaluable for the life of your business.
While it will be difficult to lower costs in certain areas, you’ll find that it is possible to run your business on a lot less money than you thought!
Because you understand Parkinson’s Law, you know that if you kept a lot of money in one place, you would end up using all of it. So you limit yourself by spreading your resources throughout different accounts and become an expert in using what you have.
See the difference that it makes to be informed about Parkinson’s Law? Understanding human behavior and how you interact with the money in front of you will go further than you can imagine for the health of your business.
That’s why Account Solve is here! Schedule a call with us today to find out more about how you can be set up for success in every step of handling your interior design company’s finances.