When you are a Small Business Owner, getting the balance of ‘good spending’ and ‘bad spending’ is hard to do. Establishing between wanting something and needing something is the first decision you need to make.
This week I had an interesting conversation with a client of mine about good spending and bad spending. When running a small business you can get caught up in believing that you need lots of different things, but in actual fact they are only wants not needs. It is important that from the outset of starting your business you establish what is essential spending and what is unnecessary spending.
Most small businesses run on a tight budget (or probably should) and if they don’t get the balance right then they could end up in all sorts of financial trouble.
Let’s take the hospitality industry. Below I have listed a few examples on essential and non-essential spending.
- Purchasing food and drinks to sell to customers is an essential expense, BUT purchasing a $500 bottle of wine that will never sell is a non-essential expense.
- Replacing the entire stock of bowls just because you want a change is a non-essential expense, BUT replacing the bowls because the ones you do have are chipped and cracked is an essential expense.
- Renovating the entire Bistro because you don’t like the look of how it currently looks is a non-essential expense, BUT replacing the carpet because the current one has tears in it and is a trip hazard is an essential purchase.
In order to run a successful business you need to make sure that you are only spending on essential expenses and not non-essential ones, unless you know that you are running at a profit and you need to spend to bring that profit down.
When trying to make a profit in your small business, you must keep an eye on the cost of wages (how productive are your staff? Do you need that many on at once?), the cost of goods sold (this is what you buy in order to make the sale – eg food and beverages are cost of goods sold for the hospitality industry) and operating expenses (are you getting the best price for your electricity/gas etc?). Once you have an understanding of what is essential to make your business tick over, and you are certain that what you are spending in those areas is essential spending only, then you should expect to make a profit.
Once you start seeing a profit you can start having some non-essential expenses.
Question: What purchases do you make that are really non-essential?