Spending Decisions Drive Business Profit
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by Matt Hyatt

A successful business owner once commented that every business decision is a spending decision. It didn’t take long to realize how important his comment was. After all, smart spending was a huge part of what made him a successful business owner instead of the owner of a failed business. He consistently spent money on things that gave him solid returns on his investments. That’s really the trick, isn’t it? If it were easy to create money by spending it, we’d all be rich!

For me, the “spending decision” concept was one that I’d never quite put my finger on before. I’ve really taken it to heart. Whether for the benefit of my own company or for those of my clients, I’ve found myself looking for the spending component of virtually every business decision I make. Once I subscribed to the idea that “every” decision comes down to a question of spending, it became faster and easier to make confident choices. In my profession, naturally, many of those choices are related to information technology (“IT”). Here are some of the things I’ve learned:

Making money and saving money are equally important – but spending it comes first. Everybody knows that you have to make money before you can save it. What’s less obvious is that you have to spend money to make money. Want to start a business? You’ll need to make a slew of spending decisions right off the bat. You’ll need a business license, a telephone, a checking account, and a place to hang your hat. Want to take your one-person business to the next level? You’ll have to hire a staff. But first you’ll need a bigger office, a phone system, computers, and more furniture. In other words, spending is a necessary step towards generating revenues and accumulating wealth. The key is to recognize hidden costs so you can make spending decisions that help you make (or keep) more money.

Most companies spend more money on people than anything else. There’s no way around it. Employees cost a fortune. Between salaries, payroll taxes, insurance, administration, and management, businesses spend huge sums of cash to hire and keep employees. As a general rule, I try to hire new people only when I think their services will increase revenues by double the amount of their salary. So I won’t usually hire a $50000-per-year employee unless I believe her efforts will bring in $100000 of additional annual revenue. After all the overhead, I figure “double” is about my breakeven point.

There’s a huge difference between “price” and “cost”. Price is the amount you pay when you purchase a product or service. Cost is the amount you pay for that initial purchase plus all the time and maintenance that goes with it. Whether you’re spending on office equipment, professional services, or even employees, the familiar saying “you get what you pay for” often rings true. Perfect examples in the IT industry are no-name “clone” computers. With prices often 10 to 30 percent less than similarly configured name-brand computers, some businesses are compelled to buy in order to “save money”. However, long-term costs associated with maintaining, troubleshooting, and upgrading a hodgepodge of aging computers are often far higher than any perceived savings made at the time of purchase.

A decision to wait is still a spending decision. Sometimes waiting can cost more than the price of making a purchase. I made this mistake myself last year when I postponed upgrading our accounting software to a multi-user version. By taking turns using the software, I reasoned, we could avoid the expensive upgrade and save money. It didn’t take long to realize we weren’t doing ourselves any favors by taking turns to use the software. So I made the purchase. A year later, I’m certain we saved far more money in labor costs than we spent purchasing that upgrade.

Accomplished business owners know that spending money is an unavoidable step in driving prosperity and success. It isn’t always easy because it requires a certain amount of planning and careful consideration of hidden costs. It can’t be ignored, either. An active business, after all, consumes cash whether we like it or not. By understanding that every decision has a spending factor, you can dramatically increase your odds of business success.

Matt Hyatt is founder of Rocket IT, an IT consulting firm near Atlanta, Georgia. For technology help with your business, contact Rocket IT at 770-441-2520 or visit online at www.rocketit.com.

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