When it comes to spending money in your business, not all expenses are created equal. In your business there are certain areas where a small investment can make a leveraged return and there are other areas where a big investment can be a waste of money. The flip side of that is there are places and times where a big investment could have an even bigger payoff. The trick is knowing the difference between the two.
Over the last 25 years, I have talked to and coached hundreds of thousands of business owners in various stages of growth. And one of the biggest turning points for my clients financially is when they learn the difference between strategic and non-strategic spending.
A strategic expense is any expense that will yield immediate profit for that expense, or it's an expense that strongly protects profit in the business. A strategic expense can also be one that will in the near-term lead to future profits. So, let me give some examples of strategic expenses. Marketing that works. Salespeople who sell. Key team members who are doing client work that are highly utilized and as such are highly profitable.
For example, let's say you had a professional services firm and one of your professional staff might be a lawyer or an accountant or an engineer. Now she is likely 70%, 80% or 90% billable and as such she's very much a strategic expense. For every one dollar ($1) you pay for her salary in cost you are probably billing out four dollars ($4) to somebody - four dollars or more to the client. That's an example of a strategic expense.
Other strategic expenses would include protecting intellectual property that you have by registering a trademark or filing a patent. Other strategic money would be the intelligent use of outside advisors and coaches. So, for example, the work that you spend with your tax strategist on how to best handle your business's tax situation to maximize the company's after tax profit or your work with a business coach helping you stay focused on those things that produce the highest return. Or working with a consultant to solve a significant challenge inside the business that will have a positive ROI and are considered strategic spending.
So, what are non-strategic expenses? Marketing that doesn't work. Salespeople who don't close. Team members who are a drag and don't produce positive return for their work, wasteful expenses that don't add to the bottom line. R & D - research and development that is not able to be commercialized. In other words, you can't use it. Those are examples of non-strategic expenses.
Finding The Balance
Finding the balance between strategic and on-strategic expenses isn't always cut and dry. The rule of thumb is this - wherever possible spend heavily or actually not spend - invest heavily in strategic expenses but cut ruthlessly your non-strategic expenses. We call this here at Maui Mastermind, feeding your winners and starving your losers.
Here's an example:
You might have three salespeople, one of whom is extremely strong in terms of her closing, one of whom is extremely weak in terms of his closing, yet, you might distribute leads equally. In order to maximize your strategic spending, you should give your best sales leads to your best closing people. Why? Because it's the most profitable thing you can do inside the company and as a strategic expense spending money on those commissions for salespeople who work makes more sense to double down on them.