One of the most common reasons for small business failure is problems with cash flow (not having the cash you need to operate your business when you need it). Looking at this another way... by learning when to incur expenses you can turn this risk for other small businesses into an asset for your own.
The secret sauce: operating profit drives expense
The world of marketing would love for us to continue believe differently but we're not falling for it anymore... at least not where our businesses are concerned.
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Revenue Drives Expense
Many years ago I submitted a purchase request to my boss at the time. It was handily rejected and he told me something I remember to this day.
"Revenue drives expense Krausse."
At the time I felt gut kicked but the lesson has been one of the most important in my career.
The short hand... if you don't have revenue to pay for something... don't get it.
Of course, there are times when you must make investments in your business that you may not have money to pay for. Large equipment purchases or startup costs may require additional funding. At it's core; however, it is critical to ensure that you have the cash to pay for expenses you incur.
Operating Profit Drives Expense
Since that time I've gone on to consider an even more conservative approach and now view expenses through operating profit rather than total revenue.
Rather than simply looking at whether or not there is more revenue than expense, I know look closely at whether or not a new expense can be covered by the operating profit. This ensures that you don't spend the same money twice by taking into account the expenses you have already incurred before adding new expenses.
Wants vs. Needs
One way to reduce costs is to identify business needs vs. business wants.
My definition of a business need is: an expense required to conduct your business that has been narrowed down to it's most essential core and for which no frills are being paid for that do not directly contribute.
Need: computer monitor
Want: dual monitor system
The dual monitors can be more productive but if you don't have the operating profit to pay for them it's time to make do with the minimum.
It is okay to add increased productivity or even convenience or quality of life expenses to your business when they can be paid for through existing operating profit but not before.
The Siren Songs of Spending
You've most likely heard all of these and maybe even used one or more of them to rationalize an expense.
- if you build it they will come
- build a better mousetrap and the world will beat a path to your door
- you have to spend money to make money
- it will pay for itself
- act now and save
- buy more save more
What the Lyrics Really Mean
- if you build it they will come after you pull them kicking and screaming all the way
- build a better mousetrap and the world will not really care very much until influential early adopters have tried it out and said it was cool on tech crunch
- you have to spend money so someone else will make money
- nothing pays for itself... you're increased productivity will not necessarily translate into increased revenue, almost certainly not immediately
- acting now is preying on your impulse rather than catering to your reasoned decision making - saving 10% on a purchase that doesn't push your business forward isn't a good bargain
- buy more just means you spent more
- Make the most of what you already have
- Plan new expenses on business results instead of the calendar
- Wait 24 hours after identifying an expense before purchasing it
What experience you have when it comes to keeping your expenses within your means as a business owner? Share them in the comments below.