It is essential to keep an eye on expenses, during good times and bad.
By Michelle van Schouwen
Small businesses are not so very different from individuals – in part, perhaps, because small companies are often run by individuals. It follows that, just as individuals tend to spend more money as soon as they earn more, economic booms can lead to a loosening of a business owner’s grip on costs.
While investing in business growth is important, it is easy to misclassify unnecessary spending as prudent investment. Increased spending may not cause problems during the high-revenue periods. However, this spending both wastes capital that may be needed later and creates new and sometimes hard-to-eradicate financial commitments. Imprudent spending can harm or even kill a company when the party ends with a business downturn.
Adhering to certain guidelines can help prevent good-time spending from becoming a bad-time nightmare:
-Don’t assume the rules of business have changed when you start to earn higher profits. The prudent measures that have brought you this far are worth sustaining.
-Beware the recurring expense. Software, cloud services, Internet, vehicle leases, and many other business expenses are now based on lease or subscription. While it would be difficult and probably imprudent to avoid all such recurring costs, watch carefully for expense creep as you upgrade any service, and beware of contracts you cannot end with reasonable notice or without paying heavy cancellation fees.
-Valued employees should be compensated fairly. Once you have achieved that, consider spot bonuses or other discretionary perks to reward performance. This way, you can reward people most when profits permit, and can manage staff expectations fairly.
-Separate true investment for growth (for example, faster computers for key staff) from optional perks (handsome desks and showy accessories). Take a hard look at whether and how each spend is going to improve productivity and make you money.
-Identify pure vanity expenses and make your decisions sagely. Perhaps your business merits the best location, a high-end facility and free lunches for staff – because you reap the benefits on the bottom line. But always be careful not to saddle yourself with commitments you will regret during a shift in business or a recession in the entire economy.
-Invest in what matters to your long-term business goals. Grade each significant expense on how it is likely to repay you, and how soon.
Ongoing business enterprises that do not have outside investors cannot sustain a “burn rate,” which is defined as the rate at which an enterprise spends money, especially venture capital, in excess of income. Burn rate can also be defined as negative cash flow, according to Wikipedia. When good times go sour, poorly-thought-out business spending can quickly turn into burn. That’s as painful as it sounds, so avoid it… at all costs.
For more ideas on how to control expenses, check out “Run your company lean and smart: Self-audit for 2017 Savings.”
_________
Michelle van Schouwen is president of van Schouwen Associates, LLC (vSA), a B2B marketing company based in Longmeadow, MA. vSA is known for vSALaunch, its proprietary, modular and scalable system for B2B marketing launches, vSAConsult, its executive-level strategic planning capability, and for its expertise in integrated marketing for B2B.
