When to Spend Money to Make Money (and When to Not)
When it comes to business, most of us live by the axiom that cash is king. We’re stringent with our overhead, careful with our purchases, and strategic with our hires. We also know that there are times you need to spend money to make money—as with marketing, hiring sales staff, or R&D.
However, there’s also a lesser-known truth about cash flow: there are times where you need to spend money to save money.
What Does it Mean to Spend Money to Save Money?
Spending money to save money is a strategy in which business owners or finance professionals consider the lifetime cost and value of something in addition to immediate cost calculations. It includes comparing the lifetime cost and value—the “total cost of ownership” or “lifetime value”—compared to the immediate cost to determine the best solution.
For instance, a low-cost hire may look good on the books now, but may come with hidden costs: increased training costs, lower-quality work, and higher risk of issues internally and/or with customers. These hidden costs eventually add up. And if these issues pile up to the point that the employee must be replaced, the company also incurs the additional cost of recruiting and onboarding a replacement. This may result in a higher lifetime cost than a higher-paid candidate in the same position.
The principle of spending money to save money can be especially true with:
- Seasonal, labor-intensive businesses
- Decisions on office and warehouse space
- Inventory-based businesses
- Equipment or other purchases that require storage
Examples of When Businesses Should Spend Money to Save Money
There are some cases where businesses should analyze their spending to determine whether a decision is being made for short-lived savings or for long-term value. These include variable or seasonal labor, skilled talent, workspace, inventory, and equipment. For instance:
Labor: Don’t Hire for the Peaks
Many service businesses staff for peak demand (the busiest time of year) with permanent hires, which can be a very expensive approach that hurts both profitability and cash flow. Instead, by using temporary, variable labor (which is more expensive in the short term) strategically during periods of peak demand and then dropping back down to just permanent staff, once the busy season passes, can reduce the annual carrying cost to the business and improve cash flow.
This approach requires conscious thought and planning regarding the time required to recruit, schedule, train and supervise temporary personnel, but it can also drive significant savings and improve the bottom line for a seasonal, labor-intensive business. It also offers back up resources when illness, medical leave, or turnover impact internal resources. And a variable labor model offers the ability to respond quickly and profitably to unexpected off-cycle or large orders regardless of the time of year.
Skilled Talent: Your Job Offers are More than Just a Number
Before you make a hiring decision based on the lowest hourly rate, consider whether it’s the most strategic choice for your company. More experienced personnel are more expensive rate-wise but cost less to train, tend to be more productive, and can generally provide better customer service. They also tend to have lower turnover. A low-cost hire may require higher training costs, lower return-on-investment, and—down the line—more frequent recruitment costs and transition downtime, making the more expensive personnel a higher lifetime value overall.
Workspace: Your Space Matters
In highly seasonal businesses, temporary personnel do not need year-long space. A short-term lease for additional temporary space may have a higher monthly rental rate but can often reduce year-round rent if you’re only using the space during the periods you need it.
Separately, retail locations often depend on foot traffic and exposure to succeed. Paying a higher cost for a better location can deliver better value to your business than the immediate cost-savings of a less-ideal location.
Inventory: Hold as Little as Possible
When placing order for inventory, many business owners assume that securing volume discounts on orders of large quantities will always save them money. In many cases it does. However, when your company holds inventory—whether for resale, service materials, marketing materials, etc., the cheapest cost-per-piece is not always the best purchase for your company.
A lowest cost-per-piece may seem enticing and money-saving but can be offset by hidden costs. It is important to recognize that extra inventory is essentially a pallet of tied-up cash. Cash that may be needed elsewhere at certain times of the year. Plus, extra inventory takes up space, potentially “tipping over” a facility prematurely when space grows tight. Rent on an oversized facility adds up over 12 months and you may not need that much inventory in off-peak periods.
If you calculate the costs of storing the product and the risk of and potential shrinkage from loss or damage in a crowded facility, the savings may not be great. Once these hidden costs are taken into consideration, the total cost can sometimes be higher than a smaller order with a more expensive cost-per-piece.
Equipment: Consider Your Cost of Ownership
Instead of looking at your equipment’s cost as simply the purchase price, you should consider the long-term cost of ownership. This includes not only buying the equipment, but also maintaining, servicing, storing, and even insuring it.
When you’re in the market to purchase equipment, first consider whether your need is consistent enough to consider buying the equipment over renting it for brief periods as-needed.
Second, consider the condition of the equipment, projected maintenance costs, and how it will hold its value over time.
And finally, evaluate the fully loaded cost of the purchase compared to outsourcing that particular function and only paying for it as a variable cost. In low flow periods, outsourcing can offer significant savings. And if the equipment requires specialized training (and thus higher skilled labor), an outsourcing partner is often better equipped with a deep bench of already trained operators.
About Preferred CFO
Preferred CFO is a strategic CFO partner for companies looking to get where they want to go faster and with the best margins possible. Preferred CFO’s talented CFO team uses a combination of historical data, industry trends, operational analysis, and meticulous financial projections to help companies achieve growth & desired outcomes faster and more sustainably. Their financial philosophy is to eliminate guesswork by presenting forward-thinking strategies and forecasts and strategies to reach and exceed company goals.
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About the Author
About Troy Skabelund
Troy Skabelund has over 20 years’ experience as a CFO and financial consultant for organizations of all sizes and industries, including 12 years at the Walt Disney Company. A former revenue maximization consultant with extensive experience helping companies raise and protect capital, he specializes in enhancing cash flow, optimizing pricing strategy, finding creative financing solutions, and designing systems and incentive plans that help a business scale profitably with less pain and stress.