“You have to spend money to make money!”
As an entrepreneur or small business owner, you’ve heard this saying before — and in fact, you might find yourself living by it (or at least, running your business by this motto).
There’s some truth to this. You do need to create a plan to funnel some amount of your profits back into your business in order to keep it running smoothly and to potentially grow your company over time.
At the very least, you have business expenses and business taxes to plan for and pay. And when it comes to growth and scaling, that often takes financial resources to make the leap to the next level.
But there’s a fine line that most entrepreneurs end up crossing over, and it’s probably the biggest small business mistake you can make.
Are You Using Your Business as an Excuse to Spend?
The truth is, you don’t always have to spend money to make money. Many startups and solopreneurs bootstrap their operations to get started — and some of them even stick to lean budgets as they grow and evolve.
It’s not always easy (and it’s never glamorous to be a saver in business), but it can come with some big financial benefits.
A ton of overhead cost — or simply a lot of spending in your business — can leave you trapped within it.
Sure, business expenses can help with your tax bill. But it’s a critical small business mistake to use that justification as an excuse to spend more money (especially if you’re using it as a way to do personal spending disguised as professional expenses).
At the end of the day, even tax-deductible business expenses are still money that leaves your pocket and doesn’t get included in your profits. These are still costs that limit the amount of money you can invest in other places, save, or enjoy as part of your net profit.
Don’t Just Focus on the Top Line: Consider Your Profit Margins
You might look at your gross revenue and feel like you can absolutely afford to spend. You might be crushing your financial goals based on that top line number of what you earn for gross annual income.
So you spend freely in your business because you can.
Or maybe you feel like some entrepreneurs who think they don’t have a choice but to spend in order to grow. Again, in some cases, that’s absolutely true.
But to make a smart decision about when it makes sense to spend in your business and when it may be time to cut back, you have to look at more than your top line. You need to consider your bottom line, too, and everything in between (like your cash flow).
In other words, look at your profit and your profit margin. Your profit is what you end up with after you pay all your business taxes (which none of us can avoid fully) and after you’ve done all your spending in the business expenses category.
And your profit margin is the percentage of the gross that you actually get to keep and put in your pocket. Your gross revenues may look fantastic — but if you only have a 50 percent (or lower!) profit margin, you’re potentially leaving a lot of money on the table.
In that case, you might benefit from keeping a tighter business budget and looking for ways to cut back.
Spending Time with Your Budget Means Avoiding a Big Small Business Mistake
Budgeting probably sounds like the last thing you want to do as a busy entrepreneur. But remember, this is a simple way to potentially make better business decisions and put more money back into your pocket.
Make it a habit to carefully review your profit and loss statements or income reports on a quarterly basis. Comb through every line item and critically evaluate expenses.
Highlight the costs that are obvious candidates to be cut and drop them immediately. You might also want to note the costs you’re not sure about, and track them carefully over the next quarter to determine whether or not they’re necessary.
With the costs you know you can’t cut, you could look to negotiate a better deal or lower price with a service provider or supplier. Researching for cheaper options might also be worthwhile, too.
While it sounds tedious, carefully minding your expenses — so you can increase your profits and not just your revenues — is vital for entrepreneurs who want to leverage their businesses to grow wealth.
If you’re not sure how to do this or simply feel like your time is better spent elsewhere, you have options. Financial planners aren’t just for personal use; the right advisors can help you get your business finances into better shape, too.