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-income-generating 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.
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.
- 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
- 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.
Sherr� DeMao is president and chief marketeer of SLD Unlimited Marketing/PR Inc., a branding, marketing and strategy firm based near Charlotte, N.C. She is the author of Me, Myself & Inc. - A Synergized World, An Energized Business, Living Your Ultimate Life . She is working on her second book, due to be released nationally in September 2010: 5O Marketing Secrets of Growth Companies in Down Economic Times.