While I was driving around, I started daydreaming...trying to come up with a good analogy about income and expense...the fundamental building blocks of business and the economy in general. Then it hit me (not literally, I was still paying attention to the job at hand: driving) - the streets were the perfect image to demonstrate my point.
This hypothetical business or organization is like a town. Roads in this town run north to south or east to west (this is clearly not a town in New England where nothing runs this true). In our town, the roads that run east/west are labeled "streets". And north/south roads are labeled "avenues". Nothing magical about these labels, that's just the way I want to do it.
Every business has (or at least should) have income. Whether it's from selling widgets, gathering money for subscriptions, payments for services or a kind and benevolent donation, money is coming in. And for this analogy income will be represented by our east to west running streets. Most organizations have more than one income source, and that's why we have more than one street. Some streets are busier than others, that too, is like our business where some income "streets" are significant and some are not. But added all-together, they represent the total east-west traffic flow in our town...our income flow.
Another gross generalization in business is that every business has expenses, be they great or small, it's gotta cost something. And that cost is expense. Whether it's your cost of goods, your payroll expenses, transportation, taxes...whatever...it's expense. In our town, expenses are the north-south running roads or avenues. And again, there are many of them and they are of different widths and capacities, symbolizing the various "sizes" of expense.
Now I'm not a city planner, (but I've played a few games of Sim
City over the years) so here are my observations: You clearly pay attention to the most important (busiest) streets and avenues in your town. 13th Street is a nice quiet little street...so I'm not going to put stop lights on every corner. I'm going to worry about 10th Street...that's our main east/west thoroughfare! Same goes with 8th Ave...got to make sure it's always paved and has all the latest maintenance, and 11th Ave? Well, maybe next year..... And in my town, I especially pay attention to the intersection of 10th Street and 8th Avenue. That's the big intersection in town, the one with the turn lanes and green arrows and cameras and stuff. It's got to remain running smoothly or both directions are impacted.
In business, you also want to pay attention to your most significant incomes and expenses, just like the streets and avenues. If you manage your petty cash box with the utmost care, but let your receivables spiral out of control, you're just not managing the most important street...I mean income. Shame on you as a manager of a business if you are literally not paying attention to, and allowing your most significant income to, using my analogy, become a street full of pot holes and a bunch of stop signs. Equally as important are your expenses. You have to watch your significant ones because they truly impact your "success" as a town...I mean business. Not paying attention to your expenses is just like that little town in the middle of nowhere that everything has fallen into disrepair...companies don't want to be on that avenue, which spirals the town's base further until it becomes a ghost town.
But what about the "busiest" intersection? Does that have an analog in our business? I think the single most important thing a business, especially a small business, can do is to place a considerable amount of their focus on the intersection of their biggest income and their biggest expense. Shame on the company that doesn't look at their largest "street" and their most important "avenue". But doomed is the organization that is not even looking at the intersection, something that a simple management report or inquiry could do. This is something that in the town business, you wouldn't last long as a town planner. But far to frequently the manager of the "business" is completely negligent at. And like the ghost town, a business run like that will soon vanish from the maps.
This hypothetical business or organization is like a town. Roads in this town run north to south or east to west (this is clearly not a town in New England where nothing runs this true). In our town, the roads that run east/west are labeled "streets". And north/south roads are labeled "avenues". Nothing magical about these labels, that's just the way I want to do it.
Every business has (or at least should) have income. Whether it's from selling widgets, gathering money for subscriptions, payments for services or a kind and benevolent donation, money is coming in. And for this analogy income will be represented by our east to west running streets. Most organizations have more than one income source, and that's why we have more than one street. Some streets are busier than others, that too, is like our business where some income "streets" are significant and some are not. But added all-together, they represent the total east-west traffic flow in our town...our income flow.
Another gross generalization in business is that every business has expenses, be they great or small, it's gotta cost something. And that cost is expense. Whether it's your cost of goods, your payroll expenses, transportation, taxes...whatever...it's expense. In our town, expenses are the north-south running roads or avenues. And again, there are many of them and they are of different widths and capacities, symbolizing the various "sizes" of expense.Now I'm not a city planner, (but I've played a few games of Sim
City over the years) so here are my observations: You clearly pay attention to the most important (busiest) streets and avenues in your town. 13th Street is a nice quiet little street...so I'm not going to put stop lights on every corner. I'm going to worry about 10th Street...that's our main east/west thoroughfare! Same goes with 8th Ave...got to make sure it's always paved and has all the latest maintenance, and 11th Ave? Well, maybe next year..... And in my town, I especially pay attention to the intersection of 10th Street and 8th Avenue. That's the big intersection in town, the one with the turn lanes and green arrows and cameras and stuff. It's got to remain running smoothly or both directions are impacted.In business, you also want to pay attention to your most significant incomes and expenses, just like the streets and avenues. If you manage your petty cash box with the utmost care, but let your receivables spiral out of control, you're just not managing the most important street...I mean income. Shame on you as a manager of a business if you are literally not paying attention to, and allowing your most significant income to, using my analogy, become a street full of pot holes and a bunch of stop signs. Equally as important are your expenses. You have to watch your significant ones because they truly impact your "success" as a town...I mean business. Not paying attention to your expenses is just like that little town in the middle of nowhere that everything has fallen into disrepair...companies don't want to be on that avenue, which spirals the town's base further until it becomes a ghost town.
But what about the "busiest" intersection? Does that have an analog in our business? I think the single most important thing a business, especially a small business, can do is to place a considerable amount of their focus on the intersection of their biggest income and their biggest expense. Shame on the company that doesn't look at their largest "street" and their most important "avenue". But doomed is the organization that is not even looking at the intersection, something that a simple management report or inquiry could do. This is something that in the town business, you wouldn't last long as a town planner. But far to frequently the manager of the "business" is completely negligent at. And like the ghost town, a business run like that will soon vanish from the maps.