Business Consulting - Does it take spending MORE money to make MORE money?
Posted on“You gotta spend money to make money” is a saying I am sure we have all heard a million different times. Likely from a million-different sales people trying to get us to do exactly that. But this old standard got me thinking. What about this phrase caught the business community’s attention in the first place?
From a purely accounting perspective, it mathematically cannot be true. Increasing your expenses can’t increase your profit because you subtract your expenses from your total revenue to get your profit number. If this phrase cannot be referring to profit or “making money,” what is it referring to? It must be referring to revenue! But is revenue really “making money?” Entrepreneurs love using the top-line revenue to measure success. The “bigger is better” mentality is ingrained in our brain as business people. The scary part is that how big your revenue is does not guarantee that you will “make money” in terms of profit. In fact, unfettered growth can often lead to exactly the opposite. Spending more money to grow your revenue at any cost could put you right into bankruptcy. How scary is that! If you have $100 of revenue, and you need to spend $90 dollars to generate that, you have $10 profit. If you have $1M of revenue, and you must spend $999,990 to generate that (business development and production included), you still have only made $10 and you likely had to work a lot harder for it!
In my practice when I first take on a new client I often hear things like “we are up $500K in sales this year, we’re doing great!” “We sold 60K more widgets this year, we are doing great!” “We added 100 new clients to our roster, we are doing great!” My response is always the same. Are you sure? Your customers will NEVER say “please don’t sell that widget to me at that low price, you can’t possibly afford to produce it for that” or “please don’t take us on for that low of a fee, your hours are worth at least as much as a McDonald’s cashier.” The business community will allow you to grow yourself into bankruptcy if that’s what you choose to do.
The real number you want to look at is your gross profit and bottom line net profit. This will tell you if you are in fact making money (after costs) on each widget you sell/client you service. Net profit will tell you if there is anything left over after you handle all the administrative costs of selling those widgets/providing those services in the first place. Sales less direct costs gives you gross profit. Saving even one percent on your direct costs will go directly into your pocket. How much is one percent of your cost of goods sold? Would that be a nice bonus for you? Furthermore, every penny you save in other expenses also goes directly into your pocket. Isn’t that exciting!
Without getting even one more customer you can increase how much money you make this year. It takes spending LESS money to make more money. I challenge you to help make this the new adage. At the very least, you now have something to say to put a stop to the next sales pitch you receive much sooner.