There’s an old adage that suggests it is possible to send yourself broke saving money. We’ve probably all been there at least once or twice in our lives… like the time you got lured in by that ‘SALE’ sign in the shop window and came out with no money left in the bank (or worse, the credit cards maxed out!) Or perhaps the time you went to that bulk discount store where you can stock up on products that are cheaper the more you purchase, and by the time you were finished you ended up spending way more than you normally would.
Well did you know that the same problem exists in business? This nasty little pitfall shows up most often in the early days for startups, entrepreneurs and small business when you’re just getting off the ground. Just like the ‘SALE’ sign, this prickly little beast lures you in with the promise of saving money but before long, it’s got you trapped in a vicious cycle.
You Can Get Stuck in a Saving-Not-Growing Cycle
The problem we’re talking about here is when you the business owner try to do all those admin-type things in your business that are necessary but will never actually bring in any revenue. You end up taking them on internally because you think your business doesn’t have enough money just yet to pay someone else to do them. Prime candidates are things such as doing the bookkeeping, paying the bills, processing employee salaries, filling out government forms and reports, etc.
Read on for some things you should consider if you suspect you may be in this cycle yourself…
There Is an Opportunity Cost to Anything You Do in Your Business
What many people don’t realise however is that this approach doesn’t actually save money in the long run – it really restricts a businesses ability to grow. At the point when you need to devote as much of your time and resources as possible to increasing your sales, you end up wasting it on non-productive activities. Think about it, for every hour that you spend doing the bookkeeping, imagine if instead you devoted that time to sales and marketing activities. Imagine what the end result would be if rather than filling out forms, you were able to get your product or service in front of a new set of potential customers eyes or ears.
The Problem is You Won’t Grow if You Don’t Make it Happen
Do you see what the problem is? You may be saving a few dollars here and there but the opportunity cost is much higher. You’re wasting the opportunity to grow your business revenue. In the early stage of your business, one of the most important things you should be doing is growing your revenue. Without this growth, you end up trapped. Your business only just stays afloat but it doesn’t really go forward. Worse still, you don’t end up building up enough of a buffer to protect yourself from unexpected business issues and if a big one comes along it can hit you so hard that it knocks your business down.
A Good Tactic You Can Use
So what do you do if you find yourself in this situation? One tactic that we like to apply ourselves is to actually calculate the dollar value of the opportunity cost and compare it to the so-called admin savings. To keep it simple, we start out by looking through our own internal reporting metrics to determine how much value (in most cases, we’re talking revenue) each of our key business activities returns per period of time. And then based on that information it becomes a very straightforward equation to compare that to the savings we make by doing the admin ourselves.
A Simple Example
For example, say we end up gaining on average one new client/customer for every 10 hours of marketing we do and say that each new client/customer has a lifetime value (after costs) of, say, $1,000. Compare this to what we might have saved by instead using that same 10 hours to do some sort of admin task ourselves to ‘save money’ – i.e. let’s say we ‘save’ $600. Well it turns out we haven’t actually saved at all, instead we’ve lost money: $600 – $1,000 = -$400! The opportunity to get a new client is wasted because we spent the time doing admin instead – it cost us $400.
Remember this: next time you find yourself sitting down at your business desk doing admin tasks that don’t actually grow your business, question them. Ask yourself if there is something else you could be doing that has a higher value in the long run. If there is, you really should look at options for swapping out one for the other.
- Anything you do in your business has an opportunity cost.
- You won’t grow if you don’t focus on growth-related activities.
- There is a simple tactic you can use to help make better decisions about where to focus your resources.
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