We all know that there are costs associated with building and growing your business, and making savvy decisions about where to allocate your resources goes a long way in determining your profitability and success. In this article, we’ll explore the differences between the costs that we think of as expenses and investments. As we’ll see, these types of costs are very different, and also they can also represent states of mind that can determine whether your business will grow and expand or stagnate and eventually fail.
In a technical sense, there is a clear difference between whether a purchase should be considered an expense or an investment:
Expense: A generally recurring expense that is spent on a resource that will be used up and won’t provide value beyond its initial cost. Examples include materials, rent and utility payments.
Investment: An infrequent cost for a durable commodity that is expected to return more value than the initial cost. Examples include real estate, computers and inventory software.
Although in the cases of both expenses and investments there is capital being sacrificed, there are key differences in how one might approach a purchase that is considered an expense or an investment. The most important difference is in the consideration of the time frame for your return of value. Expenses tend to require only short-term considerations, and tend to be easier to make adjustments to should they prove ineffective, while investments require more strategic thinking and need to incorporate more long-term considerations, as the initial cost can be high and correcting poor decisions can be complicated and costly. Visually, the different outlooks on costs look something like this:
We believe that one of the most important elements to running a profitable business is to adopt what we’ll call an “investment mindset”. Let’s explore this idea with a simple case study.
The owner of a small retail company is considering expanding his operation by buying a larger store, at a cost of $20,000 per year. Business has been steady, and it feels like it might be a good move.
Expense Mindset: “Geez, that seems a little too expensive right now. $20k is a lot of money to drop on some extra space. There’s too much risk involved, and it’s hard to say if the market will stay steady in the future. Maybe I’ll expand next year”.
Investment Mindset: “$20k for a larger space is pricey, but the extra room will allow me to start selling an additional product line. Based on conservative estimates of my profit growth I should be able to recoup the amount of my investment in 6 months and continue to grow my business even further”.
Business is all about taking calculated risks that will yield returns and help you grow. It may be possible to maintain a small operation if you only plan for survival, but in truth, that isn’t what business is all about. With a mindset like that, nobody wins; not your employees, not your customers and not even you. You might be holding back because of fear of the unknown, a lack of clarity about the direction of your business or because you’ve been burned before. But the survival-oriented, expense mindset doesn’t just stagnate growth long-term; it also leads to bad short-term decision-making.
Let’s bring this idea around to the subject of purchasing an inventory management software like AdvancePro. If you approach this purchase as an expense you will likely negatively impact the outcome in a couple of ways. You will:
- Focus more on the costs than the benefits of the software
- Give little consideration to projects that don’t show immediate results, and will become quickly discouraged when the adoption takes longer than expected
- Resist investing in the project to provide the support and scope you really need to succeed
However, AdvancePro is really an important investment in your business, and, even when factoring in an adjustment period during the onboarding phase, you can expect a full monetary return on investment within the first year. By approaching this purchase as an investment you will be setting yourself up for success because you will:
- Maintain a long-term perspective when projects are faced with challenges or delays
- Monitor the system to make sure it’s being used properly so as to protect your investment.
- Require accurate, detailed information about projects before they are funded, setting your expectations accurately
As CEO Israel Ellis is fond of saying, “Never start a project without the end in mind”. At AdvancePro, we are committed to making sure you see the return on your investment, and we’ll be by your side to make sure you’re getting the most out of your inventory management program.
To sum it all up, here’s a handy graphic created by Maria Keckler, Founder of Superb Communication Consulting, that will help you determine whether you’re thinking in terms of an expense or investment mindset. It’s time to stop surviving and start growing!