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The Do’s and Don’ts of Small Business Spending

While it’s true that sometimes you have to spend money to make money, there’s a fine line between smart purchases and reckless spending when it comes to growing your small business. It’s all too easy to fall into the trap of overspending on things that aren’t important or won’t provide a worthwhile return on investment, especially for first-time small-business owners. However, being too tight-fisted can narrow your opportunities for small business growth. To help you distinguish the difference between smart and reckless purchases for your small business, we’ve listed the do’s and don’ts for spending in the following five areas:

The Do’s and Don’ts of Small Business Spending

1. Human capital

DO invest in a hiring process, formal training and continuing education for your employees. Small-business owners short on time and resources are prone to making quick hires then throwing them straight into the fire. While hiring employees can be time consuming and expensive, losing them is even more devastating. The Work Institute’s 2018 Retention Report found that it costs employers 33% of a worker’s annual salary to hire a replacement. The report also concluded that 75% employee turnover cases are preventable, with the primary causes being:

  • Career development (22%)
  • Work-life balance (12%)
  • Managers’ behavior (11%)
  • Compensation and benefits (9%)
  • Well-being (9%)

Therefore, taking the time to find the right candidate and support their long-term growth can ultimately save your business money.

DON’T spend excessively on having a “cool” office with “unusual” perks. There are ways to build a positive work culture without spending lots of money on a bean bag lounge, cereal bar, arcade or other superfluous accommodations to attract top talent and foster collaboration. Focus on providing your employees with the bulleted items above rather than trying to “wow” them with toys or paid meals, for example. Investing in training and providing them flexibility and fair compensation will give them the fundamental tools for success and happiness at work. Besides, if employees want to work for you because of the random perks you provide, they’re in it for the wrong reasons.

2. Legal

DO protect your business. The extent of legal counsel you need is dependent on the nature of your business, however, most small businesses can benefit from basic assistance from a transactional lawyer. Professional counsel from a transactional lawyer can help you identify opportunities to use the law for business growth, avoid bad deals, create the language for your employee handbook and quickly resolve disputes. Being proactive with your contracts and decisions can end up saving your business lots of money should something go awry.

DON’T ignore legal formalities until your situation requires a litigator. It will end up costing you more to approach long-festering legal issues—such as breach of contracts, sexual harassment, ethical misconduct or hazardous working conditions—than the upfront expenses for developing preventative measures. And, if you find yourself in a legal battle, it could also harm your reputation, employees’ morale and relationship with investors.

3. Marketing

DO invest in a measurable strategy that’s shaped around your business’s short and long-term goals. New qualified leads don’t fall from the sky—most small businesses need some strategic marketing to shape its brand image, increase awareness and educate people about its products or services.

DON’T throw money at random marketing programs or advertising opportunities and hope it works. You need to research what strategies are best for your business goals and fully understand how to achieve results before executing any marketing initiatives. Otherwise, you could end up playing roulette with your cash flow and not see a return on your investment.

4. Trends

DO buy what you need. Whether it’s a set of paperclips, a new computer or a new shirt, go ahead and buy what you need to keep operations functioning smoothly or to feel confident going into an important meeting. It’s ideal to run a lean operation, but you still need to provide employees with ample office supplies and make sure customer response times aren’t affected by your lack of resources.

DON’T get wrapped in to the mindset that you need the best of everything at your office to perform well. In other words, if you need a new computer, invest in one that’s reliable, but understand that you probably don’t need a Mac just to surf the web and use Microsoft Office.  Dress professionally, but don’t go overboard by buying expensive, top-brand clothing. Travel if needed but do so modestly rather than lavishly.

5. Technology

DO invest in a user-friendly, cloud-based software that’s right for your business. Consolidated software solutions can significantly reduce the overhead expenses and complexity associated with siloed tools and may even include automation systems that can reduce headcount. With cloud-based software, your business can function remotely with minimal equipment, and therefore minimal maintenance and support costs.

DON’T spend a lot of money on hardware. Servers, network routers and disk drivers take up space, require special power and need to be placed in a room that won’t get overheated. Hardware may also come with expenses for the people it takes to install, support and maintain the equipment. With a cloud-based technology infrastructure, many businesses can get away with just supplying a few computers and perhaps a printer. As a result, hardware is quickly becoming outdated.

Like every other aspect of growing a small business, finding an appropriate balance when it comes to spending requires diligent financial tracking, intuitiveness and consistency. If your tentative about making a purchase, consider:

  • What impact the purchase will have on your financial dashboard?
  • Is the expense a liability or an asset?
  • What is your entrepreneurial intuition telling you?
  • Is this a decision you’d be comfortable repeating?

Applying your knowledge and intuition to every single purchase you make for your business can help you to consistently make smart financial decisions and put you on the path to sustained growth.

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Posted by: Jeffrey Kadlic A co-founder and managing partner at Evolution, Jeffrey has spent the past 15 years as an investor and private equity professional with a true passion for working with dynamic small businesses. @kadlic

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