By REDC Business Advisor Kerri Salls
In this economy, every business owner wants to minimize costs and maximize profits. It’s instinctive to look for ways to spend less money by cutting costs, cutting out whole line items in the budget, to be sure critical expenses, like payroll, can be met.
However, for small business owners, entrepreneurs, even sole proprietors, that approach is often ‘pennywise and pound foolish’. Too many small businesses have wiped out their marketing budget, their training and self-development budget, never mind the small expenses to keep their guerrilla marketing efforts moving forward. Too late they realize, their sales funnel is empty because without marketing, no one knows what they have to offer or even that they are still in business.
Consider looking at those marketing and sales expenses differently. Marketing and sales are profit-generating investments you make upfront to drive sales. There’s a big different between:
A. spending your entire investment budget on a onetime 30 second spot on the Super Bowl or the NBA Playoffs (I know someone who did!), and
B. a strategic marketing budget laid out for the year and tracked, so you can make adjustments in response to the market.
If you know your market and how to reach them, I would forgo the former and persist with the latter.
Where frugality is a virtue in dealing with your personal finances, it is very often a vice in business finance. If you allow frugality to undermine profitability, your business will move in the wrong direction. Don’t let it.
In contrast to your household, your business must spend money to make money. In business, you want to think about how you invest money, where you invest money to deliver on your goals. You need to ask yourself the question all the time, “Is this a wise investment for the business?” The Return On Investment principle I use and that I show clients, is the Rule of Three.
The Rule of Three: Every dollar you spend in your business should return three dollars back to your bottom line or more.
Too often, and I made this mistake for years myself. Small business owners try to live hand to mouth, with sales that just cover this month’s expenses, which is the Rule of One. You hear it in sales pitches all the time. “All you have to do is get one client (sale, contract, gig) from this newspaper ad (website banner, SEO campaign, etc) and it will pay for itself.” So the ad pays for itself; ‘spend a dollar, make a dollar’. But that’s not enough revenue to cover expenses, never mind deliver a net profit to grow your bottom line. When you succumb to the Rule of One, you start down the road of working very hard and not making any money to show for it.
Small business in general requires astute leveraged investments that consistently produce a greater yield to the bottom line. Know your numbers and track the results to be sure you do get the return you need.
When you apply the Rule of Three, you spend a dollar to make three dollars back. That’s how you can ‘spend your way to prosperity’.
If you use the Rule of Three for expense or purchasing decisions in your business, in what way could you spend a dollar that will make you three? In what ways could you spend $1,000 that will return $3,000?
The easiest place to start is with existing clients. Spend money on clients and do things for them that they don’t expect. It builds loyalty, longevity, repeat business, and referrals. And cementing current client loyalty is the easiest, fastest way to win new business.
Simple frugality or thrift can be the demise of your business if it arbitrarily starves those expenses that drive revenue or productivity. Instead use the Rule of Three in every operational expense. You’ll make better investments. Your business will prosper in this economy and beyond.