When Expenses Are Really Investments
AS A BUSINESS OWNER, you've probably heard this from customers making
cutbacks: "I can't afford the expense at this time." The domino effect has likely caused
you to view everything as an expense as well. When times get tough, companies tend to
curtail or cease spending. Everything that costs money is viewed as an expense.
Some business owners don't need an economic downturn to have an "expense only"
mind-set. This mind-set is one of the biggest downfalls of businesses in general. If
everything is viewed as an expense, then decisions are based not on a growth model but
rather a survival model. Those who start a business wanting only to survive are
sabotaging their ability to make sound, strategic decisions that will grow and sustain their
businesses.
The key is to know and understand the difference between what is an expense to your
business and what is an investment in your business. In research released in 2004
comparing high-growth companies to stagnant or negative-growth companies during the
time period after 9/11 and the 2002-2003 downturn, growth companies continued to
invest. The research was conducted by SLD Unlimited Marketing/PR Inc. from 2001
through 2004.
Important to note is that this was a standard mode of operation for the high-growth
companies. In spite of the economy, they simply continued doing what they knew was
essential based on their growth strategy. The result literally cushioned the economic blow
and allowed them to grow. This tactic is also holding true to form in this current
economic malaise.
Areas that are considered an investment by companies that understand a growth model
vs. a survival model are: image and marketing, training and development, technology,
physical location and hiring.
Image and marketing: If a business owner says she can't afford to market her business,
she truly can't afford to be in business. This is where negative and stagnant companies
went awry in the last economy. When times were good, they stopped marketing in spite
of the fact that marketing got them busy in the first place. They became too comfortable
with business flowing in, deeming marketing no longer necessary; or they had to shift to
a servicing mode to see their commitments through, so marketing took a back seat. A
stop-and-go or stop-and-wait mentality toward marketing will cause more business
failures than anything. For growth companies, marketing is an ongoing investment and an
operational part of how the company conducts business.
Example: A pediatric equipment company had been allocating a flat-fee reimbursement
for mileage and gas for its direct sales force's personally owned vehicles. While the
reimbursement was considerate to the sales force, the personal vehicles were not
effectively able to contain all the equipment or parts necessary for optimal in-service
calls. In addition, the vehicles were unmarked, hence not providing any marketing value
while on the road. In late 2009, the company investigated leasing custom-adapted vans to
test replacing personal vehicles with company-owned vehicles. Beginning in January
2010, the first van was placed on the road in an expansion market, custom-fitted to better
house the demonstration equipment and parts while also reinforcing the company brand
and image. The enhanced presence, sales and in-service ability realized from the first van
has proved that the shift to company-owned vehicles is a wise investment.
Training and development: Growth companies understand that to grow the company,
attention should also be paid to developing people within the company. Investing in
technical or soft skills to enhance the people within the company makes a company a
stronger competitor. From enhancing the ability to sell, negotiate, use software or
equipment to implementing a quality initiative for coping with stress or with working
together, training is deemed an ongoing operational investment by companies that see
their people as critical to the company's staying power and growing power. This also
positively affects the staying power of people within the company.
Example: A manufacturing company was enduring business costs such as pricing wars
and supplier conditions affecting profitability. It became apparent that more efficiencies
and less waste were paramount to operational sustainability. As a result, the company
invested in an overall plant-recycling and waste-reduction program requiring training and
new processes to be implemented. In addition, a lean manufacturing initiative was
identified, and key plant personnel received training to execute. The resulting efficiencies
enabled the company to allocate money for an ongoing and more aggressive marketing
program.
Technology: Even with its rapidly changing and evolving application platforms, when
thought through strategically, technology can be an investment that pays your business
back in a multitude of ways. A business owner should continuously be considering how
technology can help the business perform better, be more efficient or allow its people to
focus on more income-generating and income-producing aspects of the business. Too
often the "expense" of technology clouds an owner's perspective on what the technology
can ultimately do for the business in the long term.
Example: A custom cabinetry business owner saw his business begin to explode in
inquiries and opportunities to bid on projects as a subcontractor to primary contractors
serving government construction projects. Even working 16-hour days, he could not keep
up with the demand for estimates of new projects along with oversight of projects already
under way. Numerous bid deadlines were missed. After lamenting the expense of an
estimating software program that would require a $2,000 investment, he deemed it an
investment he needed to make. Not only did it enable him to estimate jobs at the click of
a mouse, it also reduced his hours-per-day worked so he could invest the time in other
ways. Jobs are streaming in vs. just inquiries.
Physical location: Being home-based saves on overhead expenses and can be an
excellent tax write-off. This can allow you to put your dollars in other areas of investment
that make better sense. An office presence, however, can be a smart investment
depending on your business's growth model. If you need a space to present the
appropriate image or to accommodate workers or meetings with clients, you may have to
consider a location outside the home. Later, as your business grows and continues to
expand in a rented space, a mortgage might become a better alternative than leasing
because the property would be an investment and a tangible asset both for the business
and for you as the business owner.
Example: A custom home builder was in the midst of expanding with an impressive
stand-alone commercial office and showroom. The new facility was still several months
from completion when his current leased space came up for renewal. With no option to
go month-to-month, the owner leased a temporary, low-rent warehouse unit to curtail
expenses until his new space was ready to be occupied. Shortly thereafter, rumors began
to spread that his business was in trouble. With the help of a consultant, the owner
realized that his expense mentality was the culprit, so he made two critical changes that
set the record straight. He invested in under-construction signage to make passers-by on
the busy highway aware of his new facility. He then moved from the low-rent warehouse
space into one of the spec homes he was building, temporarily outfitting the garage into a
complete office and showroom welcome center. These location moves immediately
squelched the rumors and brought positive attention to his business's expansion in the
community.
Hiring: One of the toughest hurdles for many business owners to clear is hiring the first
couple of people. That's because the positions are viewed as an overhead expense rather
than an investment. You need to factor your time into the equation. Before the first hire,
the business owner's time is typically being monopolized by necessary but non-incomegenerating activities. The next hire typically is needed because enough time is being
devoted to one particular business activity to warrant putting someone in charge of that
activity. The bottom line in either case is to hire in order to grow to the next level. If no
one is available to do what needs to be done, it won't get done. Period.
Example: Co-owners of a language services company were feeling the pinch of the
economy in 2009 as contracts began to be delayed and put on indefinite hold. The
company's growth plan was set for hiring a key administrative position to support the
owners in 2010. With the economy affecting sales coming in, it was all the more
imperative for one of the owners to be able to target and market the business more
aggressively while the other oversaw the work and kept it moving for clients. The owners
determined that hiring an administrative assistant was critical to enable one co-owner to
focus on income-generating activity and the other to focus on income-producing activity.
Once you make up your mind to understand and know the difference between a true
expense and an investment, you could be among the businesses that not only survive but
thrive in this and future economies.
Ask Yourself
Use these statements to assess if what you are considering is a justifiable investment. If
you can answer yes to one or more of these, then what you are considering is an
investment, not an expense.
Measurement:
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Can be directly measured for increased productivity in an area of the business
Can be directly measured for greater efficiencies in a process or the business
overall
Can be directly measured for increased profitability of products or services
Can be directly measured for increased sales in business
Can recoup and realize a financial gain as a result of the monies spent
Enhancements:
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Will allow time for more income-generating or income-producing activity
Will improve individual, team or customer-service performance
Will enhance, reinforce or protect the company image
Will add credibility or capability, which can be promoted
Will aid in distinguishing the company against competitors
Example: An attorney was frustrated, believing she had reached capacity in the hours she
could bill per week due to the time necessary to manage and run her practice. In addition,
she and her husband were planning to have a family soon, so she did not want to get into
a habit of working more hours to increase her billable hours. A consultant suggested she
track and document all of her time, including the non-billable hours, without changing
her work routine. After four weeks of tracking hours, tasks equaling 10 to 15 hours per
week were identified as activities that could be given to a strong office assistant.
The expense of hiring and paying someone else on a weekly basis had kept the attorney
from considering adding any support position. However, when it was pointed out that the
additional 10 to 15 hours could be converted to billable hours, she determined to bring
someone on board for 10 hours per week as a test. Within one month, the assistant's hours
were increased to 25 hours per week. She had also proved valuable in research support,
also a billable activity. The end result was an increase in the attorney's billable hours per
week by 25 percent to 35 percent without increasing her overall hours worked. The
administrative assistant generated enough billable activity to pay her weekly salary, plus
add more profit to the firm's bottom line.