How do you decide when to incur a new expense in your business?

Mar 17, 2016 | Anne's Blog, Expenses

This decision can be especially difficult for big expenses — but at some level can trip us up at every expense, no matter how small.  Is it as simple as ‘well I think we need this so we’ll get it?’   How much conscious thought goes into making a decision?  How much analysis?  Is any research being conducted?

Too many small business owners rack up expenses that do not improve their bottom line. The expenses do not directly help the business grow, or increase profits.

Today we’re going to drill down into the ever stressful question: “Should I add that expense to our business?” Below I explain a very simple decision process that will help guide you in making quicker, stronger decisions.  All you have to do is answer four simple questions.

They are:

Does the acquisition directly contribute to revenue generation or cost reduction? 

E.g. A business owner is thinking of buying a paper shredder.  Unless the company is in the paper shredding business, buying a new paper shredder will likely NOT directly increase revenue.  In this example, the answer to Question 1 is ‘no’.

Alternatively, consider an auto body company contemplating acquiring its first frame straightener for the shop floor.  That clearly falls into the category of contributing directly to revenue generation.  The shop’s productivity will be negatively affected if it has to straighten every frame by hand. In this example, the answer to Question 1 is ‘yes.’ 

Does it have to happen now?

Is the current paper shredder kaput? Is client sensitive paperwork piling up when it needs to be destroyed (perhaps a legal or investment firm)?  If so, then one can argue the need is urgent.  Otherwise, it’s doubtful the sky will fall if the shredder isn’t purchased for a while.

As for the auto body company, is the purchase being made to add a second frame straightener or to replace a worn out one?  If the goal  is to add a second one, is that because business is overwhelming with no signs of slowing in the near term, or is it more that it ‘feels’ like that part of the floor is continually bogged down.  Data gathering is necessary in this instance, to determine how imminent the ‘now’ is in ‘Does it have to happen now’? 

Can the cost be reduced?

Are you looking to buy the Cadillac of shredders when all that is needed is a Camry or even a Chevette? Can you get a discount by paying cash?

What would be the difference in cost (estimated life cycle cost, not just acquisition cost) to get a used frame straightener instead of a new one?   Is there a discount available for paying cash for the used straightener? 

Is there a less costly way to achieve the same result?

Does all paperwork in your office need to be shredded?  Can some of the paperwork be recycled instead?  Recycling is generally cost free and the less the shredder is used, the longer it lasts AND the less electricity is used in the process.  That may sound like pennies, but pennies quickly add up to dollars.

Have you considered subbing out the frame straightening process to someone else?   What other ideas might work that will not adversely impact your customer’s experience?

The primary reason to reflect, if only for a moment, on these questions is to force yourself to slow down and take a breath; to think the decision through thoroughly before running out and adding another expense to your business.  Doing so can save your business a great deal of money in both the short and long term.

I hope these insights were helpful and thought provoking.  You can also check out my latest free e-report, Plug Your Profit Leaks – The 5 Deadliest Profit Leaks and How to Stop Them.