Wednesday, November 26, 2008

When to Spend

I don't believe in spending money just for the sake of it. Too many of my customers are either in a rush to spend money on extravagance or are so tight fisted they paralyze their business. Somewhere in the middle is smarter. I only recommend the purchase of a product or service when it:
  • increases sales
  • increases competitive advantage
  • decreases costs
Those are the only two reasons to spend money. Obviously these are large and open-ended criteria and virtually everything can be qualified as either or. However, knowing when a purchase genuinely falls into one of these categories is the key.

When It Increases Sales
This criteria includes salaries, marketing costs, customer service, web sites and anything else that supports your sales efforts. Some are more obvious than others. The beauty of this criteria is that everything is quantifiable. Because you can measure the results of your expenditures, you are able to measure the benefits of each expense. Any underperforming expenditures should be reduced or eliminated.
Salaries are the most obvious because there is usually a direct relationship to outcomes. A salesman either closes sales or doesn't. A graphic designer either produces top quality artwork or doesn't. There are logical and straightforward metrics that can be examined to check productivity. Anyone that doesn't perform should either be moved into another position or fired.
Be cautious because some are not as clear cut as they would seem. For example, a website that provides useful and actionable information to your prospective customers can easily be mistaken as a pure expense with insufficient returns. However, if your customers are using this information as part of their purchasing decision, it would be a mistake to eliminate the expense.
You can easily measure the importance of these harder to quantify expenses with customer surveys. Another great use of the internet is to get feedback from your customers. Use your existing customer base and gather as much information on how they buy as possible. Offer them an incentive (10% discount on next order, a free gift, a free report, etc.) to fill out the survey and click the submit button. If you don't bribe them, they won't answer.

When It Increases Competitive Advantage
Your business provides either a product, a service or both. Everything your employees do should be focused on facilitating the sales, fulfillment and collection process. Anything else in your company that is not focused on these goals should be outsources. You must focus on your core competency.
What do you do better than the competition? How can you expand your lead? What do you need to do to react to changes in the economy, industry, technology and society to increase your competitive edge?
It's not enough to beat the competition. Your goal should be to annihilate them. Your goal must be to crush them totally then swoop in and pick over the carcass for any remaining valuables.
Don't be afraid to spend money on products or services that will increase your competitive advantage. More often than not, technology will be sold as a solution to sharpening your competitive edge, but you must be cautious. We all know someone that has been burned by buying into a technology that died shortly afterwards. The key when buying technology is to measure the true benefits derived for your business. That means understanding how any new gizmo will change the way you work and quantifying how it will improve things. Don't just take the salesman's word for it!

When It Decreases Cost
This is a no-brainer. If a product or service will help you save money then buy it immediately. The key is to examine not only direct costs but also the hidden costs. Hidden costs come in all shapes and sizes so get as much information as possible. You need to know what's involved.
True cost reduction is the Holy Grail for your business, especially during hard times. Always take the extra time to verify that no hidden costs will end up costing you more. After you have all the information you can make an informed decision.
Working to decrease costs is your constant goal as a business owner. Every penny of costs you cut is another penny in profit. Just don't go wild trimming costs! It is too easy to start cutting and get carried away. Focus on the areas of you business that are not related to your core competencies. Outsource whatever does not add direct value to your sales efforts, but only if you can find it cheaper.

Spend, Baby, Spend!
How you spend money is as important as how you make it. If you spend it faster than you make it, you are on the road to failure (unless you qualify for a government bailout!). Spending money wisely will ensure the long term success of your business. Just remember, if you do not absolutely need it - don't buy it.
R-Squared Computing - Business Technology Experts