One of the biggest decisions small businesses face is how to spend profits wisely to grow, and how to stay profitable when the economy slows and clients cling to their cash. For businesses of almost any size, consider these 10 key guidelines in deciding where to cut corners and save and when to invest to grow your business.
Will the investment positively or negatively affect the customer's decision to buy? Some decisions are about image. I recall hosting a 2-day event in our training center for which registrants had paid several thousand dollars. A new team member had handled the details. At noon on the first day, I noticed that the caterer had delivered the food and left plastic utensils! By the next day, we had switched caterers -- upgraded food, flatware, and table décor. Impressions count with clients! Not a place to cut corners.
Should you invest in short-term or long-term solutions? Consider this dilemma: Should you spend5,000 today to solve a problem for a year -- or10,000 today to solve a problem (or extend your growth) for 5 years? On first blush, you might be tempted to spend the10,000 as the better investment, thinking you're spending wisely because it's the "long-term" solution. But understand cash flow and opportunity cost. (See the next point.)
Where's the leverage in this expenditure? As a new business owner, if I had the cash, I typically have made the10,000 decision in situations such as mentioned in number 4. Later, I learned to consider how I could leverage that extra5,000 to grow the business in the short-term. So always ask yourself: Would that move be more beneficial than using the extra5,000 to "extend" predictable savings over the next 5 years?
Will the investment increase productivity? Far too many small business owners fail to calculate their time for doing "the little things." So instead of developing new product ideas or marketing their services, they're sending out invoices or opening mail. Hire help to increase overall productivity.
Is the expenditure revenue-related or forever overhead? Ben Franklin was right: A penny saved is a penny earned. Watch those expenses (an additional staff member here, a gadget upgrade there) that improve operations yet gobble up cash that could go into revenue-producing projects.
Is the purchase you have in mind a fad or a trend? In spending money, stay away from the bleeding-edge. Technology prices come down, not go up.
Will the expenditure develop your people? Rule-of-thumb: Two years. If employees or contractors have been around longer than that, invest in giving them new skills. Otherwise, expect them to come with the necessary skills to do the job. Academic degrees matter less and less because they represent less and less. All I want to know is this: Can the person do the job? How motivated are they?
What are the tax implications? Taxes change everything. Go figure.
Is this expenditure about ego and comfort? Personal preference here: I never spend money just to feel good about myself or to create an image. But on the "comfort" criteria, I've discovered that following guidelines 1-9 above allows me to ease the stress of a hectic travel schedule and enjoy a healthful lifestyle.
Will the investment improve the quality of your product, service, or client experience? Before I sold my training company a few years ago, I felt as though I faced R&D expenses as regularly as oil changes in my car. The company had 20 full-length (2-day) communication training programs in addition to my keynotes. That meant as soon as we finished the updating cycle on one course, it was time to start over again! Of course, updating costs money. But because our clients valued quality, up-to-date research, we continued to invest in curriculum updates over and over and over.