Most entrepreneurs only know one way to spend money. But there are two. And using the wrong one can get you into trouble. Before I tell you about them, you should think of why you spend money in a business. There’s only one reason. To get something that you can use to further your company goals. If what you’re buying won’t help you move the company forward then either don’t spend it, or realize it’s a personal expense (like flying business class instead of coach) not a real business spend.
So if the reason you’re spending money is to help move the company forward, there are 2 ways to do it. In my experience, business owners are really good at the first way – so good that it gets them into trouble when the second way should be used.
Here’s the first way – be cheap.
Let’s say you need a computer.
As I write this you can buy an old computer running Windows XP on eBay for around $100. Don’t laugh. I have a 22 year old company running on XP and we’ve bought a couple of these as backups because we know if we upgrade any part of our system (printer, operating system, custom database, QuickBooks etc.) We’ll have to upgrade it all and we don’t want to do that.
You can also buy a decent Windows 8 computer for between $300 to $500. Or you can go all out and spend over a thousand for the top of the line.
The way to buy a computer is to figure out what you need and see how little you can spend to get it. OK let’s call it being frugal not cheap. Cheap would be buying less than you need to save money – which usually costs you more in the long run. That’s why you don’t buy a delivery van that’s so cheap it will break all the time, but you don’t spend for fur lined seats either.
You get the point. Like I said, entrepreneurs are usually good at this kind of spending. Spend as little as possible to get what you need.
The other kind of spending is different.
Suppose you had a chance to buy $20 bills for fifteen bucks – and it was legit. How many would you buy? If you try to spend as little as possible in this situation, you’re crazy. You want to spend as much as you can. Mortgage your house, sell the car, cash in all your stocks; buy the twenties and then buy all your stuff back and pocket the extra money.
It’s a completely different mindset. “Of course it is”, you say, “because it’s fantasy”. Well sort of. Nobody is literally selling twenty dollar bills for $15. But the thing that makes a successful entrepreneur is that we can take what’s not valuable to someone else and make it valuable.
The trick is knowing when to be frugal, and when to spend money on the best. Why do super stars in movies and sports get so much money? Because they bring in many more dollars than they cost. You spend tens of millions more on a superstar and bring in hundreds of millions more. It’s a bargain. Ten to one – that’s even better than the 15 to 20 I was talking about before.
But you’re probably not in the movie business – or sports. I don’t think Mark Cuban reads my blog. But what about sales people? The best outperform the good (not the mediocre – the good) by way more than they cost. Same is true with computer programmers and others in creative work (yes programming can be creative). They can cost twice as much but generate ten times the productivity. It’s often true of consultants (something near and dear to my heart). They key is finding the best, and being willing to spend for it because it will be like buying a twenty for fifteen.
[UPDATE: This isn’t just true in “creative” fields. Costco and The Container Store are two retailers that pay more than minimum wage. Full time sales employees at The Container Store make close to $50K per year. Both companies feel this expense is a boost to the bottom line.]
A good entrepreneur is adept at both kinds of spending – and knows when to use each.
Let me give you an example: Steve Jobs. He never made cheap stuff. He spent money on design, materials and function because he knew that’s what would allow him to sell at a premium. But when it came to components, he got what he needed at the best price he could.
Takeaway:
- When it’s time to spend money you need to know whether to be frugal or go all in.
