Small Business Spending, What Is a Cost and What Is an Investment

I would summarise the main objective of most small businesses is to grow until the founders reach their desired exit point.

To get to that point, in most cases, you will need to spend some money! If you want to speed up getting to your desired exit point, understanding which elements of this spend is an underlying cost, and which elements are adding value and are therefore an investment.

Whether you are a start-up or have been in business for some time, it is important to understand your cost base now and how you see that changing as your plans for growth come to fruition. 

Things your Accountant might look at to understand your small businesses spending would typically be:

• Assets
• Spend related to developing a new product or market.
• Direct Costs – those specifically relating to the cost of selling your product or service.
• Indirect Costs – often office costs, finance & admin, HR maybe marketing.

You could also consider different spending cost types.

• People Costs
• Commission or introducer Fees
• Development costs
• Parts and Material Costs
• Professional Fees
• Travel Costs
• Office Costs

Or different Department Costs.

• Senior Leadership
• Sales & Marketing
• Manufacturing and Supply
• Research & Development
• Finance & Admin
• HR
• Risk
• IT

A commercial FD may also consider other ways of looking at what your business spends. They can help you to think about what is driving it.

• What are the key drivers in your business model which lead to you spending money?
• What activities are driving the spend? 
• Is it about taking your product or service to the next stage of development?
• Is it entering a new market?
• Is it a cost which increases directly with the value of your sales (Commissions for example) or the location of your customers (Delivery Costs).
• Does it change depending on which type of customer you are serving? 
• What will the step changes be when you will need to spend more to move to the next growth phase?

Another good place to start is to look at trends in your cost base through different lenses – the cost types and the departmental costs. Trends are always useful in understanding the right levels for your cost base and if your business spending is getting out of control.

I would also advocate getting into the detail; this is where you can start to categorise your costs into cost or investment (non -value adding and value adding business spending). Starting from zero, and analyse your cost base upwards – think about what you absolutely must spend and be clear on the component parts to this, and what is driving it. If you think about the Finance Function for example, there will be certain tasks which you have to do

1. Accurate Processing of Invoices (Sales Invoices & Purchase Invoices)
2. Paying of Staff & Suppliers
3. Collecting payment from your customers
4. Reconciling Bank Accounts
5. Compliance activities such pensions PAYE & VAT
6. Basic Financial Control 
7. Statutory Accounts and Corporation Tax

I would classify these activities as ‘compliance deliverables’ and as a cost to your business. Ideally, from a cost perspective, you want to streamline and automate these deliverables and make them as efficient as possible. There are amazing cloud solutions which, if set up properly, can make a huge difference to the time these tasks take and the accuracy of your core finance data.

With this core finance solution in place you then have a foundation to invest in better insight and focussed management reporting of the right KPI’s; driving actionable decision making and reporting back on progress. A Smart Finance Director will ensure that the compliance work is delivered as efficiently as possible and

• Act as your wingman and bring diversity of thought to your leadership team.
• Embed seamlessly into your existing team without the commitment to a hefty salary bill.
• Reduce the risk in your business model by keeping it lean and agile.
• Help you to consider funding options and manage the facility.
• Give you better insight and help you to make better decisions.
• Free up your time to grow your business.
• Draw on the skills of other Smart Team members as required (why have just 1 when you can have access to wider team’s talent)

This type of spend is an investment – it will deliver added value now and into the future as your business grows.

Make a start! Review all of your spending in each department, bottom up – start with what you have to spend, and think about categorising it as an underlying cost or an added value investment; this will help you to make wiser decisions on where your business should spend money.

The amount of money that you decide to spend in your business will depend on several things, but most crucially how much cash you have available.

You must decide on the best way to spend it, it will be a limited resource and you will therefore need to make the decision on how you allocate it. A sensible balance between cost and investment is a good way to make sure your business model is lean and agile, and that you are investing wisely.

Contact The Smart Team today to discuss how we can help you spend wisely.