There’s a saying that goes: “You have to spend money to make money.” It’s true! (And it’s false.) The real trick is knowing when to spend and when to save.
A Time to Spend
Spending isn’t a bad thing. Not only is spending good for the economy as a whole, it is also important to regularly invest in your business. That takes money. For example:
- New technology is revolutionizing your industry. It’s time to upgrade your equipment. That’s definitely a good reason to spend.
- You just won a new contract that requires increased production. You will need more materials, either more or faster equipment, and perhaps more manpower. That’s a good reason to spend.
- Your business is growing enough that you can no longer do it all yourself. It’s time to hire employees. That’s a great reason to spend.
The important piece of spending is understanding your return on investment. In the examples above, there’s already a plan in place to recoup the cost of any expenses associated with these investments.
Your SPENDING rule of thumb should be figuring out whether the money you’re spending is an expense or an investment.
- Understand the risks.
- Have a plan for paying back any loans.
- Pace your growth so it is sustainable for the long term.
A Time to Save
On the flip side, there are important reasons to save, as well. The biggest reason is to impose some consistency into your cash flow.
Most small businesses have a busy season and a slow season – some have bigger swings in cash flow than others, but there is always an ebb and flow. For instance, landscapers are usually busiest in the summer, but can supplement their income during the winter by providing snow removal services. The unpredictability of snow fall means these businesses have to plan for the worst and hope for the best. In short, by saving some of your revenues during the busy months to cover the slow months, you are imposing consistency into your cash flow.
The following tips should help guide your saving:
- Understand the seasonality of your business. Review your revenues over the last few years to recognize patterns and anticipate how much you will need to save to cover the lean parts of your cycle.
- Don’t live month-to-month. Look three to five YEARS down the road instead of three to five months or three to five weeks. Your long-term perspective will help balance the artificial urgency of immediate business needs.
- Stick to your budget. It can be very tempting to dip into any extra money that comes in during a big month. Stay disciplined and stick to your budget so the money is there when you need it.
Don’t spend it all. Don’t save it all.
Your SAVING rule of thumb should be to consider whether your business could withstand an unexpected expense. If you’re living so close to the edge of your budget that there’s no padding for some sort of glitch – the housing market and stock market crash in 2008, for instance – then tighten your belt and build up a safety net.
The good news is there are a lot of resources to help you properly manage your saving and spending. Business owners tend to view the world with possibility and have visions of what could be. Reach out to partners who can make sure you’re looking at your business from all sides in order to protect your vision:
- An accountant can work with you on budget and forecasting.
- A wealth management professional can help develop a strategy for saving.
- Your community banker can offer experience and insight on ways to maximize your resources, as well as supplement cash flow when the time to invest doesn’t match with your seasonal cycle.
State Bank of Cross Plains has an ready to help you add to your bottom line. From our business banking tools totreasury management consultation, we’re here to help you save and spend when the right time comes for each.