We have all stockpiled cats in order to get a huge ‘payday’. However, we all seem to get spend-happy when that large payment arrives. A simple change is our spending mindset can change the growth trajectory of our businesses—it did for me.
There are three types of things you can spend money on: Appreciable, Depreciables, and Consumables. The decisions that we make on the distributions of these types of expenditures will greatly affect our businesses, profits, savings, bank account, etc.
Appreciables are items that are bought for less than they can be sold for in the future. In this example, these would be damaged vehicles. They can be bought for roughly 40% to 55% of what the parts can be sold for. Appreciables can also be assets like land, buildings, commodities, stocks, etc—it’s not limited to just damaged vehicles. But, we all know damaged vehicles will make a quick and predictable return.
Depreciables are items that decline in value from the day they are purchased. This could be a wide variety of items for our industry: Equipment, Delivery Vehicles, etc. These are typically items that we need to do what we do. We need loaders. We need lifts. We need delivery vehicles. Although this type of expense is not as profitable as appreciables, they are required to operate. We must spend a portion of our revenue on these types of items.
Consumables are items that we spend money on that have zero possible return. A good example here is a vacation. We spend money on vacation and have nothing that can be resold—so there is zero chance of recouping any of that money. There are many other things that could fall into this category: food, rent, interest, etc. The other option is for this money to be diverted out of the business completely. This is probably the worst thing that can happen.
One trick to growing your operation is to control your spending. It’s wise to set up a plan for how you will spend money from a huge ‘payday’ like selling a load of cats. The idea is to allocate the proceeds into each category: appreciables, depreciables, and consumables. Here is how I like to split it up: 60% to appreciables (re-invested into buying more vehicles), 30% to depreciables (assets, improvements, equipment, etc), and 10% to consumables. In this model, only 10% of the proceeds are being lost while the others are being invested into growing the business.
One thing I did years ago that made a huge difference for me was to set up a second checking account to use for vehicle buying. I treated all deposits that went into that account as a one-way valve—all deposited funds MUST be spent on vehicle purchases and NONE of the money could be used for other bills or expenses. This was probably simply a mental trick, but it worked for my simple mind. I could spend money out of the primary account, but I could not spend money out of the vehicle-buying account. That money was only available to the buying team. I reverse engineered my monthly vehicle-buying averages, established a daily amount needed to transfer into the vehicle-buying account, and automated the transfers from the primary account to the vehicle-buying account.
In this example, we would transfer 60% of the proceeds from a large ‘payday’ into the dedicated vehicle-buying account. This would allow us to step-up the buying for the next several weeks. With the extra money, we bought more or higher-quality vehicles. The better buying habits resulted in better sales, better profits, and allowed us to grow the business.
The moral of the story: divert all the proceeds that you can into vehicle buying, invest in assets as needed, and strip as little as possible out of the business. Self-Control and consistency are the keys here. We must have self control to keep the money in the business. We must be consistent in pushing the envelope to increase our buying budget. Can you do it?
Wise Counsel Group, LLC