Trent from The Simple Dollar posed an interesting question in a recent post titled, Anticipating Wealth. He asks the question of what would you do differently if you knew your income would not increase over the next 10 years. What if it went down? The level of income certainty in today’s economy is definitely different after the recent recession. People that had steady jobs suddenly lost them. Others with locked-in government jobs soon saw drastic cuts in pay. Small business owners, especially, took a big hit.
So, do you make your financial choices with the assumption that down the road you will be making more than you are now? The only time I have made this assumption was when I was in college, because I was making negative dollars. Otherwise, I budget based on my current salary. If I suddenly got a raise tomorrow, I honestly don’t know where it would go.
But what about for your business? A large part of running a business is forecasting revenue and making plans that will affect you three to five years into the future. Should I buy this equipment or move to this new building? You don’t know what the future holds, but you have to act as if you do or you will never make it.
One thing to understand is that there are various zones of profitability at different levels of revenue. These “profit zones” are not equally spread out along the revenue curve. Just because you managed to increase revenues by 10% does not mean profits will increase accordingly. If you have found a profit zone, understand it and be able to recreate it. You might be tempted to reach for the next profit zone, but it may require financial leverage and increased risk. In other words, you could get out of control. How does this relate to the initial question? In the midst of an ecomonic downturn you may have to scale back to lower profit zones. Knowing how to stay profitable with lower volume is a key to survival.
The other thing you should consider is if you are not able to increase profits in the long run, you should at least be able to increase control. Try to make the same amount of money with less effort. The world keeps score with dollar bills, but if you can make a comfortable living working half as much as the next guy, have you not achieved success?