In conversations with many small business owners, money is always an issue. Whether it’s thinking that you don’t have enough money or just wanting more money, money seems to be the cause of significant stress for entrepreneurs. So, here are some best practices to keep in mind when thinking about money in your business.
Spend, but Spend Wisely
There’s no way around it- if you own a business, you have to spend money. Depending on the kind of business that you own, you have all kinds of expenses- from payroll and inventory to advertising and taxes, just to name a few. So, in order to spend money effectively for your business, it is important to understand the difference between spending money “in” your business and money “on” your business. Understanding this distinction could be the difference between success and failure in your business (and your personal life, too, for that matter!).
We can think of money spent “in” your business as basic expenses that don’t directly produce revenue but are necessities- like rent.
We can think of money spent “on” your business as investments that should produce a return- like marketing to bring in more sales.
So, every time that you evaluate an expenditure, ask yourself if it is a necessary expense. Also, ask if you could use a non-monetary means to get the same thing accomplished, like borrowing. Finally, ask if the spending will further your business goals. These questions will help you spend more wisely.
When Incurring Debt, Place Your Emphasis on ROI (Return on Investment)
Borrowing money (aka incurring debt) is something that most businesses have to do and not all of it is bad. It’s all about what that debt is being used for. Incurring debt “in” your business, to pay for basic expenses, is not usually a good idea and this is where a lot of businesses make their fatal mistake. Because of the interest involved, your business will actually pay a lot more for something with a set price. On the other hand, incurring debt for an investment into your business can be a good idea, but only if it garners a return and that return potential is large enough to more than cover the interest on that money. In other words, the rewards must be big enough to justify the risk.
Evaluate the Time Factor (aka the Cost of Time)
If you are spending on an investment in your business, your returns need to be evaluated in the context of time. This is a major factor when spending or even incurring debt to pay for things like inventory. For example, if your inventory is sold within a short time period, inventory can be a great investment, yielding big returns. But as time passes and you pay more interest, the cost of that inventory increases- thus decreasing your ROI. And if you sit on that inventory for too long, it can even cause you to lose money. This is disastrous for businesses. Sometimes, it’s wiser to quickly sell your inventory at a discounted price, instead of holding onto it with the intent of trying to make back your initial investment.
Also, think about your return in the context of how long your money is tied up. Let’s say you have $200 to invest. If you buy a widget for $200 and it takes you a year to sell it for $400, you have made $200 in a year. But, if you buy a widget at $200 and you sell it for $50 in one month, and you are able to take that money, re-invest in another widget and do the same thing every month for 12 months, in that same year’s time, you have made $50 times 12 months or $600. There’s a real cost that can be hidden in tying up your investment for a long time.
So, when thinking about your business spending, make sure to think through the ins and outs fully. Spend wisely and think about returns vs. expenses, especially over time. That will help amp up your financial success.
Do you have some money rules that you follow in your business? Please share them below.