When I founded American Consumer News, LLC in 2006, I literally spent no money getting the business up and going. I didn’t really have any money, so I started my online business using a free Blogger blog and zero-cost marketing techniques. After writing for several months on the personal finance blog I created, then called “Getting Green,” I realized I would have to move to my own domain name and hosting account to take my business to the next level. The cost was only $150 a year to get a domain name and hosting account with DreamHost, but that was a major expense for someone who was in college and still generally broke. I decided to make the purchase using my company’s meager earnings and that was my first real business expense.
An Evolving View of Business Expenses
Having run a variety of businesses over the last decade, my view on business expenses have evolved. For the first several years, I was extremely reluctant to invest revenue back into my business. I figured that the job of my business was to make me money, so it wouldn’t make sense to pay anyone to do things that I could do myself. In 2007, which was my first full year of operation, I spent just $461.63 to run my business. This worked out well enough because I had plenty of free time to do all of the work my business required while I was in college, but it was a grind to do all of the work alone.
In 2008 and 2009, I began to realize that I could get more work done and free up my time by hiring out certain jobs. At the time, I was running a network of personal finance blogs that earned money from advertising. I got burned out after writing four articles each day for more than a year, so I hired a few relatively affordable writers to cover content production on my websites. This move freed up about two hours of real productive work time each day, which I used to explore new growth opportunities for my business. By focusing on only the things that I could do and having team members take care of most of the day-to-day operations of running my business, I was able to double my company’s revenue in 2011 and again in 2012. That wouldn’t have been possible if I wasn’t willing to fork over some hard earned cash to contractors to help run my business.
While I’ve lightened up over what a business should spend money on over the years, I remain disciplined about how my company spends money. American Consumer News, LLC has been able to maintain an 80% profit margin for the last three years because I only spend money on things that either make my company more money or free up my time so that I can work on growing my business. It also helps that the marginal cost of the digital products and services my company offers is effectively zero and that I’ve identified some very effective free marketing channels.
Whenever you spend money on something, it should make back at least twice what it costs you. For example, I can buy email sign-ups for my newsletter for $2.00-$3.00 each through co-registration advertising. I know that each email sign-up will be worth around $7.00 to me over the course of two years, so I’m willing to buy email sign-ups all day long because they’re a great investment.
It’s also generally a good idea to spend money on people and services that free up your time. As a business owner, your most important job is to continue growing your business (sales, marketing, improving processes, developing new products, etc.). Generally, you are the only person that can do that. If all of your time is getting eaten up by the day-to-day running of your business, you don’t have time to work on growing your business. If you’re able to hire someone to help lighten you workload and actually use that time for business development, you’ll more than likely get a great return on your investment.
I have two customer service representatives on my team that handle 95% of requests that come in for any of my businesses. The work that they do easily frees up 3-4 hours per day that I would be otherwise working on the tasks that they do. They are a great investment for me, because that means I can start each day off fresh working on business development rather than starting off with 3 hours of customer service work to do.
If your company is paying for something that doesn’t result in a positive ROI or doesn’t free up your time, you should seriously question whether or not it’s something you should keep paying for. A lot of businesses pay for things like office space, office equipment and supplies, furniture, yellow page ads and subscription services because they think that every other business does that so they probably should as well. Paying for things because your company has always paid for them or because you think that’s just what businesses do is a recipe for low profit margins. Every expense should justify itself.
One thing that I’ve done to keep a lid on unnecessary expenses is to review everything that my company has spent money on during the previous month. I’ll print out a list of expenses and cross out things that probably weren’t necessary or a good idea in retrospect. I then give myself a score based on what percentage of last month’s expenses I still feel good about. This exercise has helped me better recognize expenses that probably aren’t necessary from the get go.
“Because I Can” Expenses
There are a handful of things that my company spends money on that do not make sense from a purely economic perspective. We sponsor entrepreneurship conferences and events, like StartUp Weekend, even though we don’t get any sort of measurable return from them. My company gives out generous Christmas bonuses and other miscellaneous perks to team members. I regularly buy lunch for new entrepreneurs and give them free advice. I buy better computer equipment than I actually need for myself and my team. While these things aren’t necessary for the ongoing operations of my business, I feel good about doing these types of things because they benefit my team and the business community that I’m a part of. I have the luxury of doing these types of things because I’ve been disciplined about other expenses and pursuing growth opportunities.
You shouldn’t be afraid of spending money on your business, but you shouldn’t be reckless about what you spend money on either. Every dollar you spend on your business is a dollar that’s taken out of your bottom line, so make sure that every dollar you spend will return at least two dollars down the line or otherwise free up your time so that you can focus on growing your business.