When to spend money and when to save can be a difficult decision when running your own business, says James Chillman, UK Country Manager for Fergus.
No two months are ever the same and while sometimes profits are good, at other times they might not be. And when the economy is as turbulent as it is now, with warnings of recession, and inflation and fuel bills rising, just ‘hoping’ a good month can look like a risky proposition.
The temptation is to spend as little as possible and to consider outgoings as a drain on net profit. While this might sound right, in reality it can be short-sighted. Because sometimes to make money, you have to spend money. You can’t just sit around and expect the cash to flow into your bank account, you have to earn it, and to do that you have to keep jobs coming in and keep completing them to the best of your ability. That said, sometimes cutting back is also the right thing to do.
So, how do you know when to spend and when to save? And how do you know what’s okay to splash the cash on, and what’s an extravagance?
Only you can answer that question, as only you understand the state of your business and your finances, but to help you decide, here’s a few things I always find helpful to remember.
Know your overheads
There are three types of overheads:
Fixed: These are non-negotiable and must be covered in order to stay in business. These include rent, insurance, phone, petrol, etc.
Variable: these can change month-to-month depending on what you have on. They include advertising, sales activity, tools and kit for a job, and staffing costs if you are employing contractors. While they’re variable, you haven’t much control over this. If you have a job booked in, you need to have the right kit and the right staff. But you can get a rough idea of how much these will be by looking at previous years and seeing when your busy periods are.
Optional: These are the overheads you have most control over. They’re the overheads you don’t need to spend money on but want to. A new carpet for the office, perhaps. A better website. Replacement tools. An office support person. Health and safety improvements. Business mentoring and coaching. The list is endless. But which will help your business, especially when times are looking tough, and which are a luxury?
To decide, consider the following:
If you’re consistently and healthily in profit and know what to do to continue the growth of your business, then it’s safe to say you’re in the fortunate position of being able to spend money on what you want.
If when looking at your net profits you find you’re quite far behind where you’d like to be, and you don’t understand why, then hold fire. Saving money sounds like the safest bet in this scenario.
Is your business carrying a lot of debt? If you have a medium-to-high level of borrowing, then resist the urge to spend. Use your cash to pay off your debt to get your balance books in a healthier state.
Do you find you don’t have enough work coming in? If that’s the case and you have a marketing plan worked out to improve things, then invest in this to make it work. If you don’t have a marketing plan in place, take the time to craft one, either yourself or by hiring someone to help. Then spend the money to put it to work and generate leads.
Are you and your team working as efficiently as you could be, or are you wasting time and money? Perhaps you have to share a vehicle to get to jobs which are some distance from each other. Or maybe you could share one vehicle to get to two different jobs which are close by, but are instead using two vehicles. Or does your equipment keep breaking down? Or do teams have to share tools, and shuttle them to and from different jobs?
First, you need to think clearly about what your inefficiencies are, and plan accordingly. If car sharing makes sense, then leave the second vehicle at home. If not, and you should have two vehicles when you only have one, perhaps lease or buy a second vehicle. Getting equipment which keeps breaking down fixed, or buying a few more tools, might well be a wise investment.
Time of year
Study your accounts from previous years to get an understanding of when you’re busier, and when you find times are leaner. Christmas is often a time when customers are slow to pay invoices, while January is often when few people get tradespeople in. Knowing when it’s usually a slow period for your business will help you plan for when best to save rather than spend.
The proverbial elephant in the room at the moment is the economy. Post-Covid and with Russia’s invasion of Ukraine impacting on everything from fuel costs to the supply chain, times are undoubtedly tough. There’s a cost-of-living crisis and customers are feeling it. This will inevitably have some impact on your business. If you need advice, speak to your accountant or financial adviser.
With all the above in mind, it’s important to remember that the only person who truly knows your business and the health of your balance sheet is you. If you consider all the factors outlined above, and apply them to your situation, hopefully they’ll help you to decide if it’s worth spending money or not.
Discover more about Fergus here