Smart Spending: How To Be A Frugal Business Owner Without Being Cheap

Published in Forbes | September 8, 2020 | Author: Thomas Minieri -- My experience working with franchisees and small business owners has given me a unique vantage point when dealing with common problems that ail many entrepreneurs. A very common trait I’ve noticed in small business owners is their struggle discerning the difference between smart financial decisions and blanket cost-cutting.

While cutting costs may be beneficial, it can also be fatal if done without careful consideration of outcomes. Companies do not grow by cutting costs; they grow by increasing sales. Therefore, if the owner, in an attempt to lower expenses, deprives essential business systems of needed capital, then it could lead to stagnant growth or negative cash flow. It’s important to consider the unintended consequences of not spending money on important business systems. Many business owners may think they are being frugal when in reality they are being cheap. Frugality leads to efficiency, while being cheap leads to a whole host of problems.


GO BEYOND THE ESSENTIALS

Only spending money on things that are essential will make your company bland and indistinguishable from competitors. For discussion purposes, consider a restaurant business bathroom. Can the owner get away with white walls, a standard sink and a standard toilet? Sure. While extra nice fixtures in the bathroom may seem frivolous to some, many customers will be positively impacted by a high-quality bathroom experience. It may make a lasting impression and send the message that the business exudes quality and has a unique personality. Just because something isn’t absolutely needed doesn’t mean you shouldn’t invest in it. Your company’s image is worth the money!

MARKET & PROMOTE

In my experience, small business owners all too often don’t spend enough money on proper marketing and advertising. My personal rule of thumb is to spend 5 to 8% of your goal gross revenue. This means that if you want a company that generates half a million dollars in sales, then you should start spending $25,000 to $40,000 in advertising now.

Once fueled with proper marketing spend, your company should be on its way to achieving your goal. Avoid spending based on where your company is today; instead, spend based on where you want your company to be tomorrow. If this formula is legitimately not possible for your business, then take it in stride. The idea here is that the common 5% to 8% of revenue philosophy may be too low for actual growth, especially if you are a startup with low revenues or a business in a highly competitive industry. Alternatively, consider two marketing spend percentages: one that sustains your current gross revenue and another that promotes growth.

NEVER NEGLECT INSURANCE

Smart business owners use insurance as a hedge against losses. In my experience, many business owners get hit with life circumstances they did not foresee. A simple umbrella plan or policy that pays you cash if you can’t work due to injury or illness can make all the difference when faced with the unexpected.

It’s not frugal to ignore insurance; it’s cheap. And it may cost you everything. If you don’t have adequate insurance, get it today. It’s simply not worth the risk.

WHEN IT COMES TO MARKETING, COVER YOUR BASES

Make sure that your customer service and sales teams have every tool they need for success. This is what I call marketing insurance. The idea is to take every action possible to ensure that your marketing dollars (the 5% to 8% of goal gross revenue mentioned above) actually turn into sales.

It’s bad business to spend money on marketing only to ignore things like training your receptionist who answers the phone or buying tools and materials for your sales team who closes deals with customers. It’s almost always money well spent when it comes to communications systems with customers, sales presentations for product clarity and modern equipment for your workers. In short, if you’re going to spend money to get the phone to ring, make sure there are no broken links in your sales process chain.

NOT EVERYTHING CAN BE DIY

In general, I believe too many people are overconfident when it comes to projects that should be handled by professionals. The desire to save money and “do it yourself” often comes with unintended consequences.

Unfortunately, in business, many of those unintended consequences are not easily identifiable. For example, the business owner who decides to save money by building their own website may never realize that their company is suffering due to their desire to save a few thousand dollars. Branding and marketing DIY projects often backfire because they tend to yield low company credibility.

Construction and repair projects can also prove costly if not handled by professionals. I once had a new franchisee who asked me about a plumbing issue. I told them not to mess with plumbing or electrical despite the temptation to save money. They ignored my advice, and like clockwork, I received a desperate phone call when this franchisee’s brand-new facility flooded with water. My advice the second time around? Shut the water main, and call a plumber!

While some DIY flops can create those “we’ll look back at this someday and laugh” moments, many can seriously stifle company growth due to lack of awareness. The smart business owner knows their strengths and hires professionals to fill in the many gaps.

LEARN FROM THOSE WHO CAME BEFORE YOU

The cheap business owner avoids spending money when they can and should. Being frugal in business means you look past the short-term solution and consider the big-picture consequences with respect to time and money.

If you think about how spending or saving a small amount of money today will impact you tomorrow, then you are well on your way to becoming a savvy entrepreneur. The last tip in this article is to remember to seek the advice and guidance of those who have gone before you. Education and training, especially from successful entrepreneurs, is always a smart investment choice, and one that may not only save you money, but help you grow and scale to your heart’s content.