Cost And Effect

Michael Kurela suffered a loss his first two years in business, largely because he invested in computers and other technology that were needed to open Penn Consulting, his one-person Pittsburgh financial management and consulting firm.

"My costs were extremely high," Kurela recalls. "I didn't want to take [on] debt to fund the business, and my first few years were complete losses."

Like Kurela, almost 90 percent of small businesses surveyed had computer equipment in their offices, and a majority also reported having fax machines and copiers. But, surprisingly, expenditures for technology, not including telecommunications, accounted for only a fraction of 1 percent of the median annual sales of the surveyed companies.

Why? Experts say costs for new PCs and other equipment occur infrequently. Every two to three years, a small business adds or replaces its PCs and other gear, spreading the purchase out over many months.

One area where entrepreneurs should spend more now to save in the long run is on information technology for gathering cost information. Only 71 percent reported using accounting software, and even fewer use spreadsheet software.

Low says failure to gather and analyze financial data is a common error of small businesses when it comes to understanding and controlling costs. "You need to have internal accounting [in place]," he says, "so you can observe and manage your own trends."

This article was originally published in the January 1998 print edition of Entrepreneur with the headline: Cost And Effect.