Can One Borrow Big Corporate Practices To Manage Personal Finances?
I am not a personal finance specialist, I wouldn’t pass my self as an adviser even, I struggle with my own finances and do need expert advise from time to time.
In searching for ‘THE’ magic formula for growing wealth I have grappled with the question as to whether one can apply the principles and frameworks used by big successful business (Big Corporate i call them) to to grow and accumulate wealth.
Big Corporate, have overtime built tried and tested systems, processes and tools which they apply to great effect to grow shareholders value. One of these processes in particular, matter of fact I dare call it a ritual, is the Annual Business Planning ritual (with its various semantics) where billions of man hours are spent refreshing the companies’ plans on how to grow revenues, manage costs and return a cash dividend.
You Reap Where You Sow!
My question has been whether i can apply a similar approach to my personal finances?
I have listened to countless people tell me how i should build passive income. However when i look at the amount of man hours big corporate spends on the annual planning ritual, i now consider passive income an a myth. I am convinced that to realize your long term goals of financial freedom, you have to dedicate the time and effort to actively manage your egg nest just like big corporate does. However, unlike big corporate where your colleagues chip in, you will have to invest a disproportionately higher amount of time as success will comes down to individual efforts. If you are fortunate you might chance at the small crop of people that helps you along the way.
Now let examine the various pieces of this corporate ritual to see if we can extract any gems.
First up is Opportunity Mapping!
Big corporate are always looking for ways in which to increase their revenues, always combing through their target consumers, shoppers and customers segments to identify how to best sell more and sell for more i.e. at higher prices. They spend time doing the leg work — understanding what changes are happening, why those changes are happening and what are the implications for their businesses — new trends that they can ride and the discontinuities that they need to be wary of. Thereafter they employ quantitative methods (own or through industry experts) to estimate the potential and prioritize where to bet their share-owner funds.
Similarly you and I should actively engage in finding opportunities to grow our egg nest.
Opportunities abound, both for the risk averse and for the daring alike, the difference will be in the returns they get. Be it investing in ‘passive sources’ like bonds and term deposits, engaging in a craft making or hobby farming from your kitchen window, moonlighting your professional skills in the gig-economy, teaching at a local school or even to the more fast paced activities like margin trading.
The key, so I am told, is finding something you enjoy doing and pour your energies into it. Do remember though to follow the systematic approach of big corporate.
If you’ve been doubting whether you are past your best by date to start, worry no more! A recent MIT study found that the most successful entrepreneurs are the not wonder kids in their 20’s who are touted as disrupting this or that business model but rather some tried and tested old hand like you, so go on out and try out ‘a lil’ something on the side’.
Besides the money, there are health benefits of having something on the side. According to Mike Templeman there is need to engage in that side hustle as it could help reduce your stress, give you more freedom and make you happier.
A side hustle could allow you to apply that talent you have been suppressing for too long, help you develop some important skills you can apply back at the ranch, besides it could develop into a full blown full time source of income.
Second up is Portfolio and Mix Management!
Big corporate manages its portfolio of products and markets over what is commonly know as the product life cycle, knowing when to introduce new ones to latch on developing trends, when to cull nonperforming products to exit unprofitable market segments and which products to invest in and how to optimize those investments to maximize cash returns from mature segments. Finally they prudently allocate resources (be they money, time or people) commensurate to the expected returns from each opportunity.
In the same vein once one has identified a couple of avenues that they can leverage to grow income, you have to manage when and how to pull those levers to grow wealth. It might come down to bing an master in timing and understanding your own attitudes and reactions to financials decisions (behavioral finance they call it) and how you use conventional wisdom. For example in the financial markets when to buy a stock, when to hold cash and when to divest from a counter — conventional wisdom buy low sell high — good luck with that.
Furthermore no one, two or three avenues will suffice over your life time as business and lifecycles ebb and flow. Therefore over your lifetime you will need to continuously manage the levers you pull, which ones do you accelerate when and which ones to drop for some other better yielding one.
Another important tool for portfolio managing your financial levers is knowledge of risk reward tolerance. Economists have argued for ages that the higher the risk the higher the return and vice versa. To this end you must introspect to understand better you risk threshold. Unfortunately age weighs in very heavily in this respect. The nearer you are to retirement the lower your your propensity to take risk should be, since you have a built a bigger egg nest and the fall would be greater than a twenty something year old. Just because the MIT study says you have higher odds as an older entrepreneur doesn’t mean you mortgage the farm.
Thirdly Manage the Costs of Doing Business.
One of the biggest conundrum faced by big corporate is how to price their products in the face of changing consumer tastes, growing presence of alternatives and deepening competition all of which are exerting downward pressure on prices. Big corporate has turned its focus into productivity through a) reducing what they spend on things they buy and b) whey they can not reduce optimizing what they get in return for what they spend.
As well, reduction and optimization should be our mantra. Don’t be a Pound Wise, Penny Foolish individual but rather keep an eye on every little cost detail and you could save yourself a tidy sum. Big corporate have an even more teneous ritual of performance management where they look at how they are progressing every day, week, month, quarter etc. While it might not make sense to monitor incomes that closely, it is absolutely crucial to monitor leakages (i.e. costs) from your nest egg that regularly.
When it comes to optimization the best tool i can think of is compound interest. Its one of the immutable laws of nature where things multiply forward, with tons of patience! As Charlie Munger said “the first rule of compounding is to never interrupt it unnecessarily”.
There is a whole self help industry on the of negotiations out here , learn from some of their tips and tricks and soon you will find that you are optimizing your cost base (my most practical read so far is an oldish treatise How to Negotiate Anything by Herb Cohen). I am not advocating that you become stingy, I am pointing out the opportunity to maximize the bang for your buck to use the cliche.
Fourthly Manage your stakeholders and especially the Customers
Many successful businesses invest tons of money in managing their stakeholders and most importantly managing their customers as the conduits of value between them and the end consumers. They do this by carefully understanding what the customers’ objectives are, painstakingly tailoring their offerings to match the customer strategy and demonstrating how they create value, relentlessly executing and tracking against those plans while managing the softer ends of the relationship through hob-nobbing with the customers.
Like you and I must delineate who our most importantly stakeholders are and especially the most important customers (sources of value) are and then nurture those relationship to create cash cows. Let us take the example of an employed person without any other sources of income. This person can be said to be selling labour and their most important customer becomes their employer. This person then cannot afford not to manage the relationship with their employer in a pedestrian manner since a termination could spell doom to the long term objective of wealth creation.
Please note that you should value relationships with both large and small customers — because a smaller customer today could be the big thing tomorrow — life happens. This balancing act does get complicated as one develops multiple avenues for income and wealth but also as one factors in other stakeholders that are potentially a drain on the accumulated egg nest.
Fifth, Embrace Technology, Tools and IT enablement
Over the years big corporate has continued to pour billions of dollars into technology, tools and IT enablement in a bid to tap into the latest technologies to become nimbler, more efficient and churn out products. However the budgeting systems in most places are still steeped in 20th century most novel tool, the spreadsheet. There are too many war stories to tell about spreadsheets, its only prudent to say it is about time to embrace new tools.
You see I learnt my accounting in the era of physical book keeping. Although I have evolved to embrace spreadsheets, I do struggle with technology and despite multiple apps that can provide me with real time information on how my portfolio is doing, research insights, insights from practitioners and the like. I still maintain the details in a spreadsheet and my excuse is that I cant find an app that integrates everything into one place (therein lies and opportunity for the more tech savvy). I urge you therefore to embrace abit of technology it could give you an edge.
Sixth, Organization
In managing their revenues, big corporate deploys an army of people to sift through mountains of analyses to glean those bits of insights that allow them to better target opportunities.
In managing our egg nests, you and I should take a similar approach. How can we deploy the resources and people available to us to better manage our egg nest.
Most folk argue that is costs a lot to engage professional service providers, the cost of ignorance though could be multiples more if one makes poor decisions informed by even poorer data and information. As George Clason counsels in the Richest Man in Babylon never send a brick layer to buy you gold. In other words don’t take advice from one who doesn’t know the secrets of wealth creation — get a mentor, get an adviser — some one who is versed in wealth-craft and who can teach you how to create grow and sustain wealth.
Better still abandon those friends with get-rick-quick schemes yet who are perpetually broke. One caveat though, take lots of advice but make the final decision, you are the CEO of you and the buck stops with you.
Seventh, Having in place robust Processes
Big corporate is pedantic about their Annual Business Planning rituals, every year like clock work they engage in this never ending exercise. Sometimes though a little perturbed that its time to do it again! Before we dismiss it entirely in our cynicism, there is value in going over the same process year in year out.
Big corporate uses the opportunity to review whether they are making progress against their objectives, to re-calibrate their objectives and expectations, to allocate resources but more importantly to learn through best practices and unlearn non value adding practices.
At the individual level, creating and executing similar rituals could be of immense value in our quest to grow wealth. Spending the time to review how we are doing against our goals, to review the performance of the portfolio and make decision on which levers to pull.
The key to success here lies in institutionalizing such a routine or process to the point it becomes second nature. More that anything else, I wish to wager that this is the hardest part of wealth creation, having the will power and the discipline to hold an honest conversation with one self around objectives and to do it every single time you have appointed for that conversation.
What is will power, Arkard has the best explanation for it
“Willpower!” retorted Arkad. “What nonsense. Do you think willpower gives a man the strength to lift a burden the camel cannot carry, or to draw a load the oxen cannot budge? Will power is but the unflinching purpose to carry a task you set for yourself to fulfilment. If I set for myself a task, be it ever so trifling, I shall see it through. How else shall I have confidence in myself to do important things.
- Richest Man Babylon
Lastly, Balance short term gratification with long term expectations.
The last point though is a big departure for Big corporate, you see though they be methodical in applying this framework to turn great profits for the share owners and reap fat bonuses in the process, the big corporate process can be laborious and back breaking creating many unhappy people along the way (“Have Fun” we are reminded every so often :-(
It doesn’t have to be so with you and I, enjoy the process, have fun in creating wealth. If the process becomes burdensome it is only a matter of time before you lose interest and revert to the path of least pain, its human nature.
Economists argue for delayed gratification — suffer in the short term to reap greater benefits in future while the Preacher in Ecclesiastes 3:12–3 teaches that…And also that every man should eat and drink, and enjoy the good of all his labour, it is the gift of God… arguing that we should enjoy the fruits of our labour throughout. On this one I throw my lot with the preacher.
In conclusion I believe it is possible to borrow a leaf from big corporate in managing ones finances, however such a venture must be accompanied with the requisite diligence and practice so as to realize sustainable gains in the long term.
