When investing in your business there are certain things you must do before making a decision. Actions such as buying a new product, paying for services or starting a new promotional or advertising campaign must be thought through. You don't just get an idea and act on it, purchase new equipment or outsource services before thinking it through. Here are some of the steps you should take before spending any of your business's hard earned money.
Check Your Budget and Planned Economics
Before spending any money on your business, you should first check how well you are doing against your budget. Are you on budget, below it or above it regarding your spending and profit levels. Do you actually have the cash to spend on new equipment or a fresh advertising campaign?
What you should not do is overspend your budget in the hope that the product, service or campaign will make enough money to cover it. Many companies that are doing well will have the spare cash to enable them to meet the expense while still staying on track financially.
Others that are not doing so well may be tempted to spend their way out of trouble. Perhaps you may believe that new equipment will be more efficient and help improve profitability. Maybe spending on a new promotional campaign will improve sales and get you back on budget? This may be true, but you should never act on impulse with business decisions especially those that involve spending. There are many 'what ifs' in business, such as:
- What if that product doesn't improve efficiency as much as you hoped?
- What if outsourcing a specific task ultimately costs the business more than doing it yourself?
- What if your advertising campaigns fails to generate sufficient business to meet its cost?
Your business could then be in even more serious trouble. It might even fold! Before spending any money not budgeted for, make sure you either have the funds to cover the cost, and have done your homework to reduce any associated risk to a minimum. Here are some ways to achieve this.
- General Budgeting
A business budget should include fixed costs and variable costs with some put aside for development. As much expenditure as possible should be fixed in your annual budget, and potential variable costs should be analyzed very carefully.
Here are some examples of fixed annual costs:
- Fixed rate energy deals.
- Wages and salaries.
- Leasing vehicles and office buildings.
- Financed real estate or equipment.
Energy Costs: Fixed rate energy deals may save you money should energy prices increase as they often so. Their main benefit is the fixed cost that you can include as such in your budget. Your profitability will not be affected should energy costs increase.
Wages and Salaries: Arrange salary and wage negotiations for the end of your financial year. These will then be fixed costs for your budgeted year. Also, make sure wage negotiations and salary increased are applied prior to you setting the budget for the following year. You will know why if you have been learning from this.
Lease or Purchase: You could purchase vehicles and office space rather than lease if you have the capital to do so. Leasing is generally easier to budget. Then again, if you have the initial capital, purchasing saves money over the longer term. All you pay is interest which could change. It's a difficult decision to make, and one that is often made for you.
Financing Equipment and/or Real Estate: Another way to maximize fixed costs would be purchasing on finance rather than buying outright. Sure, this will result in financed items costing more due to interest. However, they will then be a fixed cost that you can budget for. It is not so easy to budget for incidental expenditure during the financial year.
Changes in variable costs, such as hiring extra staff, should be calculated against projected extra income. It may also be justified by spending being under- budget due to higher than budgeted sales or lower operating costs (even though this implies sloppy budgeting!)
- Managing Incidental Expenditure
Any incidental expenditure should be carefully managed. Big businesses generally have the wherewithal to enable most such expenditure, other than major spending such as on new production or heavy equipment. This type of higher-level expenditure is normally planned ahead, then included in the budget for the next financial year. This would include the capital cost spread over a fixed period of time, including annual depreciation: the general reduction in value of equipment and vehicles over time.
Small businesses may not have this luxury and must purchase items outright or through finance. If this is you, then you must consider very carefully what your are buying and how to pay for it before ordering. What will it bring to your company? How long will it take to pay for itself?
A new advertising campaign may be a better investment than new office furniture. Frivolous spending may come back to bite you later in the year if you have to advertise and your cash is locked up in new desks!
Before spending any money at all that was not included in your start of year budget, you must consider carefully what that expense will bring to your business. Look at the item or service and assess its worth against its cost. What benefit does it bring to the business?
Are you buying just what you need, or are you paying extra for needless bells and whistles in fact, are these bells and whistles just glitter or are they worth the extra cost? Can the equipment do two jobs, rather than buying two cheaper items that ultimately cost more? That's the kind of thinking you will need if you are to justify any unplanned spending.
- Should You Reinvest Your Capital?
Buying new machinery, new services and paying for new advertising and promotions can be costly. The question is, should you invest your capital on these improvements? Should you spend money on marketing communications, more sales personnel, new products, higher wages or bonuses or upgrade what you already have? Or should you stay as you are if it is working for you.
These are difficult decisions to make, so which should you go for if any? A proper understanding of the things to go for before investing further in your business is essential before you open that checkbook. In fact, should you reinvest your capital at all, or should you sit on it for when it is absolutely essential for you to spend? Rainy days may or may not come, and while waiting for one you may miss the bus!
If you have a good understanding of your core business, and can decide when it does or does not need extra cash injected to it, then you can make an objective decision. Any money spent on your business must be used to improve that business. Closely examine what you are paying for and if:
- Is it necessary?
- Will it improve your core business?
- Will it reduce manufacturing or service costs.
- Will it increase sales or reduce costs?
- Will the increased sales or lower costs result in increased profits?
- Does it give the best value above competitive products or services?
That first question is the critical one you must answer positively. If it is not necessary, then leave it. Go no further, unless you already making tons of profit and can afford to take chances. The others should also be considered. Expenditure can certainly result in increased sales if spent wisely. However, the cost of increasing sales may be greater than the extra profit achieved.
Get the idea? It's not what you spend that is important, but how you spend it. Any expenditure must either reduce product costs (whether manufacturing or service provision costs) or increase the efficiency with which that product or service is provided. Either of these can help make more money or get more clients.
Things to Go For Before Investing In Your Business
So, knowing all of this, what are the things to go for before investing further in your business? What is needed before you actually spend the money? Our discussions above should now have you in the correct mindset. Understand your core product or service, and do not spend unless your spending impacts positively on that core: either expands it, improves it or makes it more profitable.
- Assess Costs vs. Payment Structure
Identify the factors needed to increase the difference between the cost of providing what you do and what you get paid for it. This cost might be a one-off, such as manufacturing a discrete product and getting paid for it. That's OK. An ongoing service involves other problems. The cost of providing that service must be less than the payment you receive.
A service might involve a large initial capital expenditure, and then lower spending on a monthly basis. Your pricing must reflect both aspects, and the initial capital spent should be recovered over a defined period. If you calculate that over two years, then the minimum contract period must last two years. If costs are calculated over five years, then a five-year contract should be applied.
- Prospects and Customer Retention Rate
Your customer retention rate is another important metric. If you are already meeting the needs of your core market, then investigate the outlook for future revenue. If you have enough prospects in your sales funnel to warrant additional expenditure, then you must first make sure they will convert to customers. That's when your customer retention rate becomes important. What proportion of prospects entering your sales funnel passes through to the bottom? This should be a budgeted figure even if just a guess.
If your retention rate is less than budgeted, and if you are not keeping your customers, then your sales funnel will be irrelevant. You must find out why your customers are leaving and sort that out. Make sure your revenue is either stable or increasing before spending over your original budget. Work on maximizing your income before considering further expenditure.
- How to Best Spend Your Money
Once you are happy that your business is making money, and that it continue to do so, then prioritize how you spend any excess over budget. Your first priority will be ensuring that cash keeps regularly coming into the business, and the volume of payments are properly managed.
- a) Your first expenditure after paying the regular bills should be to upgrade your financial systems. Make sure you have the best finance/accounts staff you can get, and then spend money on upgrading your financial software. That will pay off far more than making a one-off purchase of luxury vehicles or upgrading your office furniture.
- b) Next, keep your employees happy. Give them extra bonuses, more training and new equipment. Do not pay them more unless you are sure your income will remain growing. Extra pay cannot be reduced, but bonuses can be paid when warranted, and not paid when they are not.
- c) Any money spent should increase your profit margins, improve your core product/service or improve manufacturing efficiency. A service industry will have fewer direct costs than manufacturing, but even there, money spent should contribute to improving efficiency and profits.
Things to Do Before Investing In Your Business: Conclusion
Unless it is making amazing amounts of cash, you should consider the various things to do before investing in your business. Remember, you are here to make money, not spend it. If you have to spend then spend wisely. Spend money on what will improve your business but most of all, spend money you can afford to spend. You don't want your business to fail before your 'improvements' have had time to filter back to your bank account.
Make sure you research your core business. Only spend money that helps develop that core. If you can expand your core business then you will succeed. So never spend money needlessly every dollar or pound spent must improve or expand your core business.
Finally, having done all that and you still have money to spend, then do so on anything that improves your product or keeps your employees happy. Your employees are as much an asset to your business as the bricks and mortar and the equipment. Investing in your business is sensible, but do it at the right time and spend your money on improving your business or expanding it. Identify your core product or service, the reason for the existence of your business, and spend money on that.
Author Bio: Sonal Patil is an avid reader and loves to experiment new things and a huge technology enthusiast. She is a research analyst being which she enjoys to analyse the market and work on market data at an market research providing firm in the industry.