Q:
I have noticed that you talk about cutting expenses but not cutting investments. Seems to me that "money's money." When things get tight, I stop spending. What else am I supposed to do?
A:
In a weak economy, the knee-jerk reaction is to cut anything that does not seem to make a direct, immediate contribution to the core business operation. But in the rush to get rid of extra spending, investments sometimes get tossed as well.
A few questions:
- Suppose I offered you a bank account that paid 10 percent interest. Would you invest in it?
- What if you could lease another truck, hire an employee for $4,500 a month and add $5,000 to your monthly net. If the market was there and other expenses held, that's an 11 percent yield every month. Sounds good, right?
Here's a tougher one:
- Suppose you could invest $1,000 a month to get no increase in net, but doing so would prevent you from losing $2,000 net to your competitors. This starts to feel uncomfortable, but you are actually getting 100 percent payback. If you did not invest, you would lose $2,000 to save $1,000.
What are some other ways your money can work to help you? Consider these examples:
- If a $10,000 software application would save you $20,000 over the next year, would you buy it? Remember: If you don't spend the $10,000, you lose $20,000.
- Let's say you could hire a business coach for $2,000 a month who helps you reduce expenses and improve productivity by $4,000 a month in a short time. Without the coach, you "save" the $2,000, but lose the $4,000. Smart?
You get the idea. For every dollar you don't invest wisely, you lose many more hard dollars. It may feel like you are being fiscally responsible to slash all spending, but you leave big bucks on the table.
A good thing about tight economies is that they force us to dig deep into the business, understand where the money's going and start actively managing the finances. But smart money management does not mean just locking up the checkbook. It means making every dollar provide maximum return to your business. Cut back on office supplies, not smart investments.
Do your homework
Before spending a dime, consider these important questions.
- What is the likelihood of the return? An automatic thermostat has a 99 percent chance of saving you money on day one. Determine the likelihood of your project's success.
- What about your timing-will this investment start paying back soon enough?
- How much cash is required? Consider the amount and whether you will need it as a lump sum. Think about where you will source these funds, how much debt you will incur and what the cost of capital will be. Determine the availability of your funds-is the cash locked up, or can you stop and start the investment spending as cash flow dictates?
Construction Business Owner, September 2010
