Management of expenses continues to be the most important element of planning money. That’s why we talk about it a lot. We use and spend money on a daily basis and our attitudes about money are revealed in a lot of those habits. I’ve always believed that if you can’t manage one hundred shillings you will not be able to manage the millions. Today I want to look at certain aspects when it comes to our spending particularly when expenses rise. Something we all do without thinking about it. Let’s look at these scenarios. Bob manufactures soap for customers. This year has been hard on him. Manufacturing costs have gone up and labour costs have gone up. His other competitors have simply raised their prices. After all people do need soap and will buy it whether costs have gone up or not. But raising prices of his product is disturbing Bob’s conscience too much. He has decided to take a hit on his profit margin for the sake of his customers. Martha is Bob’s competitor. They both sell soap, though Martha’s is a more premium product. Martha knows what she has to do. She has to increase the price of her product. Unfortunately the increase in manufacturing costs has to be passed on the consumer for her business to remain viable. Nyokabi prefers Martha’s product and really does not want to change her brand of soap. However she knows that her budget is tight and she cannot fit it in. However she then remembers the monthly contribution she makes into a savings policy. She contributes over and above the minimum. She then decides to just cut it by one thousand shillings every month. That way she can continue buying the soap she likes. For her brother Morani, the decision is very automatic. He also has a savings plan but does not touch it. The next time he is in the supermarket he notices the increase in prices. He simply moves over and figures out what fits his budget. He then starts using Bob’s soap.
There are a couple of lessons to pick out from these scenarios. Firstly let’s just understand that expenses will always go up. It is not a surprise. I’ve heard a lot of conversations where people blame the businesses. They call them greedy for increasing prices but sometimes even these companies have no choice. Wouldn’t we like all manufacturers to behave like Bob, but that doesn’t happen. I’m sure you found his story incredulous which was the objective. Most business will have to do what Martha did to remain viable. So as the consumer understand that prices will go up. Let’s look at Nyokabi’s choice. She is using a premium product that she can no longer afford from her regular budget. So to continue enjoying it she cuts her savings. Remember how Bob’s story was unbelievable? She is the consumer version of Bob. Let’s imagine Nyokabi was a business. The savings she does would be her profit margin. She has decided to take a hit on her profit margin to pay somebody else. This is a classic mistake that many of us do. We take the same hit. Say you save Kshs 10, 000 per month. Your electricity prices go up by Kshs 5, 000. You may lean towards reducing savings by Kshs 5,000 in order to meet the electricity expenses. You are also Bob. KPLC is not Bob. They have not sat around debating how to reduce their profit margin to protect the consumer. They are Martha. They do what has got to be done and pass the increase on to you. You have got to pass that increase on to somebody else. Do not pass it on to your savings. In our classes we like putting it this way. Don’t become a bigger builder of somebody else’s factory at the expense of your own factory. Your factory is the savings and investments you are doing. Money that will ultimately work for you is your factory. Don’t decrease its profits unnecessarily.
So what should Nyokabi have done? She can choose to follow Morani’s footsteps and start using Bob’s cheaper brand. This is not downgrading it is just being sensible and financially aware. Alternatively if she still wants to use that same brand pass the cost to somebody else. Back to our power situation. Now that we know that the power company is not Bob, we can become more aware and efficient with electricity consumption. Use energy savers, don’t leave lights on, watch the use of microwaves, heaters etc. If you still want to use electricity in exactly the same way, just as Nyokabi may still want to use that particular brand, then pass the cost to another factory. In other words find that five thousand shillings somewhere else. Cut another expense that may not be as important to you as electricity or that brand of soap. Be clever with how you buy food, cut down on entertainment expenses, be efficient on transport etc. The moral of this message is do not compromise your factory just to build somebody else’s. Moran made the right choice for the short term but I’d still like to see more from him. It’s not just about cutting expenses indefinitely. If that’s all we do it is not sustainable. Since expenses will always be on the increase, we must be purposeful about increasing income and income sources. Even if a Bob does exist there comes a time when he will have to increase prices of soap. Morani’s income must be growing somehow. Keep an eye on that factory of yours.