When your business is still in the startup phase, and even when it’s not, the most tempting thing to do is save money for that proverbial rainy day. Of course, having a reserve is always recommended, but in my 20+ years in the business world, the number one reason I have seen for business failure is not failing to set aside enough money. The number one reason I have seen for business failure is a refusal to spend money.
Of course, that’s not to say that you should spend your money indiscriminately. In fact, regardless of the level of your success, every dollar spent should be seen as an investment. If you are not getting a return for your money, it is simply not worth it.
So, how does one calculate ROI? It’s not always as simple as one might think. The basic formula is Gains – Costs/Costs. The video below uses an example of $1,000 in advertising bringing in $2,000 in sales. Based on the formula, the ROI would be 100%. Not bad until you start to calculate other factors in, such as the company’s manpower.
So what should you spend money on?
Marketing – When times are tough, cutting costs is important, but more a more important strategy is marketing. Make sure your website is search engine optimized. Advertise intelligently. Now is not the time for a risky new advertising campaign. It is a good time to kill campaigns that are not working. While full rebranding might not be in the cards, if your logo looks dated, you could be losing sales – same with your website.
Your Office – Do you regularly entertain clients in your office? If so, do not cut back on the cleaning team. Ragged and dirty carpet says a lot about a business. So does old furniture. You don’t have to invest in top-of-the-line, but make sure everything is clean and not chintzy. A fountain in the waiting room might be a bit extravagant, but a comfortable place for a client to sit, is not.
Employees – There was a time when employees were the last to go. Today, it seems they are often the first. Before cutting back, calculate each employee’s ROI. You may find that hiring more sales people could help bring you out of a slump. You may find that more office people, not fewer, will free you up to do what you do best.
Computer Hardware and Software – This can be a tough one. If a computer or piece of software can dramatically save you time, it might be worth it. If not, you might wait till times are a little better. Outside sales people should have relatively new equipment and reasonably fast software.
Green Investments – Green investments have both a tangible ROI (savings in utility bills and potential tax savings) and intangible. Many customers, especially in the Bay Area, prefer to spend their money with green businesses.
Clearly, if you have an immediate cash flow crisis and credit isn’t in the cards (no pun intended), cuts sometimes have to be made which could hurt the future of the business. However, if it’s not an immediate crisis, a healthy business is built with increasing revenue, which often involves spending.