These 3 questions will help you make sure you're managing your money well.
When you're a business owner, choosing when to spend and when to save is a crucial decision that can either lead to hard financial times or a huge leap forward. This point was made crystal clear during my first year in business at Metal Mafia, which I started in 2004. Much of the money we started with went to buying powerful computers that we needed for design work. The computers were costly, so we had to spend less on something else in order to be able to afford them. Thinking we were being thrifty and that printing was the least of our worries, we decided that we could save by using the inkjet printer that we got free with the purchase of the computers, rather than buying a more powerful laser jet.
When we had little to print, the inkjet was fine, but it couldn't keep up when we started getting a lot of orders. Every day, as the cut-off time for our package pick-up drew near, we panicked knowing the driver might have to leave before the invoices had finished printing, stranding our customer's orders until the next day. Six months in, we knew something had to be done. We took the money we had saved to replace our folding chairs with real ones, and bought a new printer instead. The arrival of our laser jet was the most fundamental teaching moment in our company's history. As the invoice pages printed with mind-blowing speed, we felt completely amazed and somewhat embarrassed. How could we have waited so long to make this important purchase?
Every company has its own laser-printer moment, but here are three questions I ask to help me decide when to spend and when to save.
Will your company function better if you make this purchase?
Every purchase should be evaluated in light of this question, without exception. The answer is always a simple yes or no. Our company has more than 5,000 small products, and they need to be easy to find, pick, and ship. When we opened, we knew that choosing the right bins to store them was essential. We chose the bins with the highest functionality instead of the lowest price tag, knowing this would give us a competitive edge in the long run. Easy to pick products meant more orders shipped in less time. Seven years later, we still have the same set-up, and have never regretted the decision, even though paying for the expense in the early days was hard. If the item will make your business work better, it is worth its weight in gold.
How will the item impact your bottom line?
Sometimes you think you have to spend a lot, but it may be more important to make sure you just have the basics covered. When setting up our business, we investigated using one of the well-known advanced software products in the fashion industry. All the things it could do in the demo seemed amazing, and we thought the price tag, which was $10,000 (about $8,000 more than we had hoped to spend) would be worth it. We found out in week one just how wrong we were. Nothing worked the way it was supposed to, tech help was located three hours behind our time zone, and we lost an incredible amount of time and energy trying to make it work. We realized our error quickly, returned the fancy stuff, and purchased software that was devoid of the bells and whistles that had dazzled us with the first, but let us do all the things we really needed to do. That cost $395 and allowed us to get to work immediately. Finding the item with the right features rather than the most features should be the defining criteria of any purchase decision.
Will your clients benefit from the purchase you are considering?
If you are still having trouble deciding if the item in question is worth purchasing, determine if and how the purchase will affect your customers. When we first created our website, we thought that having a Flash multimedia intro would be a really cool way to give our brand a certain feel. The site, however, was intended to be a tool to give our customers an easy way to shop our products. When we learned that adding Flash would slow down our website, we had to consider the idea carefully. Given that most of our customers were still on dial-up at the time, we made the choice to skip Flash and spend the money on optimizing both the speed of our cart and the different ways in which our customers could choose to shop. Sometimes the purchase will not save money, but it can offer indirect financial benefits like reducing potential customer frustration.
Saving is not always about the bottom line. Sometimes you have to spend more in the short term to get savings in the long term. Likewise, spending more is not a growth strategy in and of itself. When you are considering your company's expenses, make sure you are relating them to the bigger picture before deciding when to open up your wallet and when to hold tight to the purse strings.
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Vanessa Merit Nornberg: In 2004, Vanessa opened Metal Mafia, a wholesale body and costume jewelry company that sells to more than 5,000 specialty shops and retail chains in 23 countries. Metal Mafia was an Inc. 500 company in 2009. @vanessanornberg