The following feature is by Waceke Nduati-Omanga.
The most important aspect of planning your money is keeping your expenses in check. That is why I talk about it a lot. Our attitudes about money are revealed every day when we use and spend money. The fact is that if you cannot manage Sh100, you will not be able to manage millions. Another fact of life is that expenses are always going up, but we react to this change without even pausing to think about it and choose the right way to manage our money in the face of the rising cost of living. Let us look at some scenarios to help us understand this better.
Bob manufactures soap. This year has been hard on him. Manufacturing costs have gone up and labour costs have also gone up. His competitors who are facing the same problems have simply increased the price of their product. After all, people need soap and will buy it whether its price goes up or not. However, the thought of increasing the cost of his soap pricks Bob’s conscience so much, that he decides to take a hit on his profits to shield his customers from a more expensive soap.
Martha is Bob’s competitor. She also manufactures and sells soap, but Martha’s is a more premium product. As soon as the cost of production goes up, Martha know what to do. She does not hesitate to pass on this cost to her customers so that her business remains viable.
PROFIT MARGINS
Enter Nyokabi, a customer, who prefers Martha’s soap and does not want to change to another brand of soap. However, Nyokabi’s budget is tight and the wise thing to do would be to drop Martha’s soap. However, instead of looking for a cheaper soap that works for her pocket, Nyokabi remembers her monthly contribution to a savings policy. She usually contributes over and above the minimum, so she decides to reduce her monthly contribution by Sh1, 000. That way she can continue buying the soap she likes.
Now consider Morani, another customer who uses Martha’s soap. When he gets to the supermarket and finds that Martha’s soap is now more costly, his decision is automatic. He simply looks around for another soap that will fit his budget. He starts using Bob’s soap. Note that Morani also has a savings plan, but he doesn’t touch it.
There are a couple of lessons to pick out from these scenarios. First, expenses will always go up. Don’t blame the businessman or call him greedy for increasing the prices of his goods; sometimes he doesn’t have a choice but to do that to keep the business afloat. Yes, we would love all manufacturers to behave like Bob, to risk going under but shield the customer from higher costs, but that is incredulous and not likely to happen.
The reality is that most businesses have to do what Martha did to remain viable. Even Bob will eventually have to increase the price of his soap if he wants to stay in business. This means that the cost of the goods you buy will go up. So what do you do? Will you behave like Nyokabi or will you behave like Morani?
Nyokabi is using a premium product that she can no longer afford, so to continue enjoying it, she cuts her savings. She is the consumer version of Bob, doing something incredulous to shield herself from reality. To put it in perspective, think of Nyokabi as a business. Her savings are her profit margin. She has decided to cut her profit margin to increase someone else’s profit margin. This is a classic mistake that most of us make.
Say you save Sh10, 000 every month, then the cost of electricity goes up by Sh5, 000. Will you reduce your savings by Sh5, 000 to pay for electricity? That is what most of us do. If this is what you would do, then you are just as incredulous as Bob. Kenya Power on the other hand is like Martha. The managers have not sat down debating how to reduce their profit margin to protect you from higher electricity prices. When their costs go up, they pass on the cost to you, the consumer. Just like Kenya Power would, when costs go up, you have to pass on that increase to someone else. Do not pass it on to your savings. In our classes we say: Don’t build someone else’s factory at the expense of your own factory. Your factory is your savings and investments. Money that works for you is your factory. Don’t decrease your profits unnecessarily.
COST CUTTING
So what should Nyokabi have done in the face of rising expenses? The wise thing would be to follow in Morani’s footsteps and start using Bob’s cheaper soap. This is not downgrading; it is being sensible and financially aware. Alternatively, if she still wants to use Martha’s brand of soap, she can pass on the cost to someone else by earning extra money to cover the higher cost of the soap.
Same story when the cost of electricity goes up. Keep your bill down by becoming more aware and efficient in how you use electricity. Use energy-saving bulbs, don’t leave lights on, and watch the use of microwaves, heaters and other electrical appliances and so forth. If you still want to use electricity the way you have always done, pass that cost to another factory.
In other words, find that extra Sh5, 000 somewhere else, and not from your savings or investments. Cut another expense that may not be as important to you as electricity or that brand of soap. Be clever in how you buy your food, cut down on entertainment expenses, be efficient on transport and so forth.
Back to Morani, who seemingly made the right decision. He made the right choice for the short term, but cutting expenses indefinitely is not sustainable; after all, there will always be new expenses and the cheaper goods we buy today will be more expensive tomorrow. The best thing to do is to purposely increase your income and sources of income.
Again, do not compromise your factory to build someone else’s. Your factory should come first. Always.