Settling the Great Debate: How to Know When to Spend or Save
You’ve heard the saying: “You have to spend money to make money.” While the underlying concept is true, the real trick is knowing when to spend and when to save to create a stable, thriving business. The Covid pandemic certainly taught us all to be ready for anything!
When to Spend
When building a business for the long-term, it can be harder than anticipated to open that checkbook. Especially at the beginning or during times of significant growth, your instinct might be to protect any profits.
However, 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 during key milestones. For example:
- Your business is growing enough that you can no longer do it all yourself. It’s important to recognize when it is time to hire employees. That’s a good reason to spend.
- It’s time to upgrade your equipment. If new technology is revolutionizing your industry, then staying abreast of more efficient and more effective ways of doing things is important to remain relevant. That’s also a good reason to spend.
- You just won a new contract that requires increased production or more space to provide services. You will need more materials, possibly more or faster equipment, and perhaps more people. That’s another good reason to spend.
- You need to pivot in response to current conditions. One of the basic tenets of business management is to give customers what they want the way they want it. Those wants tend to change over time. When Covid came along, businesses had to invest in infrastructure changes to create safe conditions for both workers and customers. Restaurants and entertainment venues created outdoor spaces. Professionals shifted to providing services virtually or online. However, the need to pivot can come in the form of a new technology or a new way to interact at any time – think typewriters, printing houses, movie rental stores, and more.
The important piece when it comes to spending is to fully understand your return on investment. Is there an opportunity and a plan in place to recoup the cost of any expenses associated with these investments?
Your RULE FOR SPENDING should be to figure out whether the money you’re spending is an expense or an investment.
In some cases, not spending would be the greater risk for becoming outdated or unable to fulfill your growth potential. Instead of fearing expenditures, establish projections for how this investment will impact your company’s growth and finances. Then create a plan for paying back any loans. Be sure to pace your growth appropriately so that the new level of service or production is sustainable for the long term.
When to Save
Obviously, there are important reasons to save, as well. One of the most common reasons to save is to impose some consistency into your cash flow.
There are certain periods or milestones in your business when spending is essential, but it is equally important to establish stretches of time for saving.
The following tips should help guide your saving decisions:
- Understand the seasonality of your business. Many businesses have a busy season and a slow season. Some companies have bigger swings in cash flow than others, but there is almost always an ebb and flow. 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. In short, by saving some of your revenues during the busy months to cover the slow months, you are creating consistency in your cash flow.
- 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 monthly budget so the money is there when you need it.
- 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.
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, then tighten your belt and build up a safety net.
Partner with Professionals
The real answer to the great debate? Don’t spend it all. Don’t save it all. There is a time and situation to implement each strategy, and those times probably overlap a bit.
The good news is there are a lot of resources to help you properly manage your saving and spending. Business owners and entrepreneurs 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 budgeting and forecasting.
- A wealth management professional can help develop a strategy for saving and investing for the future.
- Your local community banker can offer experience and insight on ways to maximize your resources through Treasury Management, as well as supplement cash flow with responsible financing when the time to invest doesn’t match up with your seasonal cycle.
State Bank of Cross Plains has an entire team of professionals ready to help you add to your bottom line. Our business banking tools and treasury management consultation can ensure you make the most of your available resources. We’re here to help you save and spend when the right time comes for each.