In business, we say, “hold your money accountable” often with a finger shake at ourselves or at others. But what does that actually mean and how do you do it?
The adage might have come from its cousin “you have to spend money to make money.” So let’s take a look at these and see what we can learn. In essence, these sayings are really wise advice if you apply a couple of principals to the catchy phrases to make them more practical. In evaluating spending, a rule of thumb for me is first to determine if the money is designed to maintain the existing business or to grow the business. Let’s take the first category – money spent to maintain/service existing business.
In this case, I’m looking for efficient ways to spend as little as possible and provide the best service/product as possible. I find the biggest issue here is cost creep – where your operating expenses just increase with seemingly no reason. Every 6 months I do a deep dive into the businesses to see what we can eliminate or scale back from operating expenses. Is there a better technology solution on the market? Can I bid out insurance and get a better value? What subscriptions did we buy that didn’t work out that need to be canceled? What services are no longer relevant that we are still paying for? I’m always able to find at least 10% that can be adjusted in this review and by looking at it twice a year, I’m holding our operating expenses “accountable” to deliver our result as efficiently as possible right now. Our businesses and the competitive landscape change so often, it’s critical this is done at least 2 times per year.
The other kind of capital is growth capital, new investments you’re making into the business with the hope the investment leads to new business. This might be a new marketing campaign or marketing asset, or it might be a new hire or a new partnership of some kind. Or it may be a new system designed to enhance and expand your company offerings. In this case, I’m looking for a 10X return on cost. For example, let’s say I’m starting a new social media ad campaign and I’m spending $1,000 a month on it. I want to see a clear line of sight to $10,000 per month in revenue from that spend within an appropriate period of time. Now 10X may seem like a lot, but if you think about it, you are probably only taking $.30 on a dollar to your bottom line and there are substantial costs associated with launching and integrating something new to the business. And not everything you try works so you have to factor that into it as well. When you do the math, you’ll see the return bar needs to be pretty high to justify the cost.
As we close out the 3rd month of the year ask yourself, as you holding your money accountable to a result? Are you spending money with a principal in mind and clarity on an outcome? Are you running your business to a net number? Or is the business just running you?