It is always enjoyable talking to people about their new business. The excitement people have when they have truly committed to starting a business is contagious. Like clockwork, from my personal experience, 90% of people immediately start talking about all the things they need to buy. New computers, even though they have a laptop. Conference tables where they will hold power meetings. Brand new dual 29 inch monitors. A new Car to establish their new status and announce that they are part of the elite Entrepreneurs of the world. But is that how you start? Do you really need anything more than what you already have? Before an answer can be realized, we first have to know what kind of business is being started.
Every person on this planet is starting with limited resources. Even billionaires like Donald Trump and Warren Buffet. At what point is the business going to be profitable? Some businesses have a higher barrier to entry than others. Online businesses on average can be started for way less than people estimate. Products for retail can sometimes be acquired after the sale has already been made. Free software can be used for the first site instead of a custom made extravagant shopping platform. Open source image manipulation programs can be used until $50/mo adobe license will not be a burden. Restaurants and other brick and mortar businesses may have a greater up front cost, but do you really have to buy new tables. You can get a nice used desk for your office that looks just as nice to customers as a new brand new $2000 desk.
The main question to ask when deciding on a purchase is: Will This Purchase Bring Profit to the Company! If you’re a Realtor, a nice car to show houses can affect your purchases if dealing with a specific customer base, but if your customer base is not influenced by your vehicle, does it really matter. For Realtors, it definitely can!
A few of the reasons for spending money when you start a business:
- Provides a better user/customer experience
- Establishes a required status or impression with your customer
- Allows you to provide a service or product
- Increases your productivity or ability to provide a service or product
- Resale or acquisition of services or products
- Increases your brand (marketing, licensing, etc.)
- Ensures protection (insurance, backup services in case of emergency, etc.)
The bottom line is, will this purchase bring profit to the business and (What Most People Do Not Ask!) how will it bring the profit? The easiest way to avoid budgeting pitfalls is to open up a spreadsheet application:
- List the expense name.
- Enter the amount of the purchase
- List how much money this purchase will make you. This can be daily, weekly, or monthly
- Put your current Daily, weekly, or monthly income.
- total how long it will take to recover the money with how much the purchase bring into the business
If how long it will take to recover the cost can not be calculated, it is most likely not somethings that needs to happen right now. If you are a graphic design artist, and a brand new mac will enable you accomplish two more hours of work per day, and the going rate is $30/hr, then calculate how much more work you will be able to acquire due to your new productivity level. If you are not able to pick up additional work, but it makes your life easier, then the question comes down to the current budget. But spending $1800 – $2500 on a new computer when it will not bring any additional work can not be justified if the existing budget is negative $500 a month. Know your budget, Know your profit and loss, and as Rod Tidwell in Jerry Maguire said, “SHOW ME THE MONEY!!!”.