Is it a Cost or Investment? Answering this Right is Crucial

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One of the hardest decisions a business owner must make is determining when an outlay of scarce business cash should be seen as a cost...


...and thus with the goal of minimizing “money out” as much as possible.


And when that same outlay should be viewed as an investment...


...with the goal of building a company’s asset portfolio and maximizing long-term ROI.


Sadly, in most small businesses no distinction is made.

The usual mind-set is frugality, whereby any “money out” no matter its potential strategic value is reviewed through a strict “minimization” filter - i.e. the lowest cost option being highly preferred.

Now, for sure frugality is and can be a business virtue, as evidenced by the legion of over-funded startups that burden themselves with high, unsustainable cost structures and then recklessly burn cash and doom themselves to quick insolvency.  


In more mature businesses, high cost structures often force companies - even if they don’t really want to - to sell “legacy” products and services and take on patently "unstrategic" and unattractive customers to pay the bills and keep the lights on.


In contrast, frugal businesses stay nimble, and pivot and respond as marketplaces become more competitive and customer preferences and demands change and evolve.

But too often, frugality becomes an end in itself versus what it should be...an empowerer of a brighter company future.  


Contrastingly, usually the most interesting cash outlays a business are its potential investments where long-term ROI and the contribution of that outlay to a company’s asset portfolio are far more important considerations than cost.

Here are some common scenarios where this is the case:

  • When evaluating employee compensation.  

  • When designing and building new products and services.


  • When building "soft" company assets, like the brand of the company, its logo, collateral, and its strategic and financial plans and forecasts.


  • When evaluating “inorganic” growth opportunities, like financing and M&A.


  • When evaluating outlays for technology - both on the hardware side (desktops, laptops, fast Internet, etc.) and software (Salesforce, Slack, QuickBooks, et al).


All of the above are examples of working on and not in the business kinds of decisions and cash outlays, and where the three questions below can be a quick acid test to distinguish between when we should be assessing them through investment and not cost lenses and filters:


  1. Will the outlay be a saver of time and worry for senior leadership?

  2. Will the outlay make more of a long-term versus short-term business impact?

  3. Is the outlay one we “fear” to make?


This last question is of the “trust our business gut” domain - the natural wisdom that arouses: a “pit in our stomach” when we contemplate projects and opportunities that call to our highest and best selves.


A neat thing about this three question approach is how it shortcuts more complex and data, financial and accounting analysis while as often as not arriving at the same answer.


And with time and energy saved, we can then turn our full focus to finding the courage to do what we know we should:

Make the best long-term decisions, commitments, and investments we can for our businesses.


And ourselves.


Need to Focus More on Opportunities in Your Business?


Feel like you are just “treading water,” and focused too much on the costs and expenses of your business and not its opportunities?


Need a burst of energy, ideas, and vision to get your business unstuck?


If so, we should talk.


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