Investment Vs. Expense
By Jayme Broudy, Contractor’s Business School
Dear Jayme:
I hear 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?
-James
Dear James:
In a weak economy, the knee jerk reaction is to cut anything that doesn’t seem to make a direct, immediate contribution to the core operation of the business. But in the rush to get rid of the bathwater, the baby sometimes gets tossed as well. Investments are the babies.
A few questions:
• Suppose I offered you a bank account that paid 10% interest. Would you invest in it? Probably so.
• How about if you could lease another truck and hire an employee for $4,500 a month and add $5,000 to your monthly net. If market was there and other expenses held, that’s an 11% yield every month. Sounds good.
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’re actually getting 100% payback. If you didn’t invest you’d be losing two grand to save one grand. Not so smart.
Where else should your money be working to help you? Examples:
• If a $10K software application would save you $20K over the next year, would you buy it? Remember: if you don’t spend the $10K, you lose $20K.
• 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? Remember; these are hard dollars.
You get the idea. For every dollar you DON’T invest wisely, you LOSE many more hard dollars. It may feel like you’re being fiscally responsible to slash all spending, but you may be leaving big bucks on the table.
Before spending a dime, however, do the homework. Things to consider:
• The likelihood of the return: An automatic thermostatic has a 99% chance of saving you money on day one. Determine the likelihood of your projects’ success.
• Amount of return: 10%? 50%? 1000%? Realism, here. (I bet I can find a 200% opportunity in your business in two hours).
• Timing: When will an investment start paying back?
• Cash required: How much? Lump sum? Debt? Source of funds? Cost of capital?
• Cashflow: Impact of investment upon ongoing and projected cashflow requirements.
• Is the cash locked up, or can you stop and start the investment spending as cashflow dictates?
All of these things require some serious thought and analysis and there are always tradeoffs, but there’ll usually be some low hanging fruit.
I’m not an accountant, so confirm with your financial pro but remember that accountants are paid to avoid risk and, aside from Treasury Bills (I hope), there are no risk-free investments.
A good thing about tight economies is that they force us to dig deep into the business, really understand where the money’s going, and start actively managing the finances. But smart money management doesn’t just mean locking up the checkbook. It means making every dollar provide maximum return to your business. Cut back on office supplies but hang on to the babies.
My best,
Jayme
Jayme Broudy is the founder and principal of Contractor’s Business School® - a coaching, training and consulting firm specializing in helping contractors produce more profit in less time. Since 1993, Jayme has worked with hundreds of contractors in many specialty areas to build successful stand-alone businesses. Visit www.contractorsbusinessschool.com/assessment to complete a free Business Analysis, or call (800) 527-7545 to get the FREE CD "10 Key Strategies to Build a Business that Works."
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