From building a product portfolio to expanding into new verticals, small business owners are constantly faced with decisions on when to invest capital, when to borrow and when to save. And with the success of your business on the line, some of these decisions can be difficult to make. In the below post, guest contributor Ty Kiisel, an author with 25 years of experience helping businesses achieve financial success, discusses how to best prioritize your expenses and shares his top three tips for making the best financial decisions for your business.
Having spent the majority of my career in small business, I’ve come to appreciate the importance of managing expenses and determining where to spend valuable resources. Regardless of how large your bankroll is, the odds are there’s never going to be enough capital available to do everything you’d like, so prioritizing business expenses can be challenging—particularly when there is a never-ending list of expenses and a finite amount of capital.
Growing up in a small business, I’ve acquired a fairly conservative perspective on prioritizing business expenses generally, as well as determining those things for which I’m willing to borrow. I mention that because what I might classify as a luxury could be an essential part of doing business for someone else. Regardless of where you and I might agree or disagree on what those priorities are, that’s a determination you’ll need to make for you and your business.
A Practical Approach to Prioritizing
As a business owner, I recognized there were some things I needed to spend capital on because they were necessary to do business. Those things might be different for every business, but every business has them. There are also things that have the potential to positively impact growth, which I would often put at the top of my list. With those things in mind, here are my three rules for practical prioritizing:
Prioritization Rule #1: Before You Spend, Make Sure There Isn’t Another Way Around
I started my career in my Dad’s small industrial supply business. Our first delivery truck was second-hand, and, because we could arrange for deliveries on a lift-gate truck when we received deliveries or when we were shipping something out, he was able to put off buying a forklift until he had set aside the money to buy a used one. In his mind, spending money he didn’t have (or borrowing) for something we could work around was just too expensive and something that could wait.
Sometimes, finding a creative and less expensive solution to a problem can be better for the long-term health of your business. Although popular media seems to suggest that you’ve got to spend a lot of money to make money, that might not always be the case.
In a conversation with John Sperry of InMoment, he described how they tackled some of the challenges they faced in their early years as they wrestled with deciding where and how they invested their resources within a high-tech environment:
“By taking a very expensive IVR (Interactive Voice Response) system, via the telephone, online, we were able to reduce our cost per customer survey response from $.60 for every interaction to $.06. We did a lot of things like that to make it less expensive for us to do business. Some of those things even helped improve our ability to build the best product in the end. We had to do a lot of outside-the-box thinking, which was very good for us. We used web technology leveraging our skill set but also leveraging the latest technology. This was critical early on because we were able to use web developers to develop a phone technology and it allowed us to use the same structure when we eventually moved to Web based surveys.”
Although these two situations are from vastly different circumstances, they both applied Prioritization Rule #1.
Prioritization Rule #2: Use Any Rainy Day Funds Wisely
A few months ago, I spoke with Sandra Esmard, franchise owner of the Maids of Palm Beach County. Although we were talking about making the choice of whether or not to buy a franchise, some of her advice speaks directly to Prioritization Rule #2.
Sandra was lucky enough to have money set aside to fuel her expected marketing and operations expenses the first few years. “We were prepared with enough capital to invest in marketing and sales for the business, and sustain our operations, for the first three years after we opened the doors,” she explained.
Her advice is to be careful where and how you invest any extra money into the business, “And, don’t forget a backup plan,” she says. “Even if your discretionary fund runs dry, you still need to keep the doors open and find new customers to keep your business alive. You may need to borrow, forego a personal paycheck or two, or make other tough decisions to keep doing business.”
Fortunately, following Prioritization Rule #1 will make it a lot easier to follow Rule #2.
Prioritization Rule #3: Identify the ROI
Prioritization Rule #3 probably applies the most to those circumstances when considering borrowing capital. Because there are expenses associated with borrowing, there are likely some times when borrowing makes more sense than others. I tend to take a more conservative view of when borrowing is appropriate, which is why I think the following resonates with me.
In a survey conducted last march by the Electronic Transactions Association, those small businesses suggested they were looking for a 5-times return for every dollar they borrowed. In other words, they expected the ROI for borrowing to be $5 for every $1. As a result, the two most common reasons for seeking a small business loan were purchasing equipment (54 percent) and inventory purchase (51 percent). Both purposes have the potential to increase ROI—either by making it possible to do more business or sell more products.
Although this rule makes a lot of sense to consider before you borrow, it also makes sense to consider this rule whether or not you’re thinking of a small business loan.
Using these three rules for prioritization will help you determine what’s important to you and establish priorities that may help you build a successful and thriving business. Ask yourself, “Will this add value to my business, will it provide additional ROI, or will it help me run my business more efficiently?” If you answer yes to any of these questions, it’s probably worth the investment.
Ty Kiisel is a contributing author focusing on small business financing at OnDeck, a technology company solving small business’s biggest challenge: access to capital. With over 25 years of experience in the trenches of small business, Ty shares personal experiences and valuable tips to help small business owners become more financially responsible. OnDeck can also be found on Facebook and Twitter.