Confusing Expenses with Investments - Profits Prophet

The Danger of Confusing Expenses with Investments in Your Business

Confusing Expenses with Investments

Have you started to view everything in your business as an expense that needs to be cut back on or eliminated completely in order to increase revenue and drive growth? If so, you’re likely looking at everything the wrong way. Why? Because those who view all spending in their business as an expense are likely in survival mode rather than growth mode. This could be a long-term issue stemming from experiences that happened to them long ago, or it could be more recent and a result of the recent pandemic and economic downturn. Though business has forever changed in the past 20 or so months, it’s the entrepreneur who recognizes the opportunities for growth in this change who will prosper.

How can you tell the difference between an expense and investment?

An expense is something that you spend money on but that doesn’t contribute to the growth of your business. When trying to determine the difference between an expense and an investment, ask yourself the following questions:

  • Can this be directly measured in terms of increasing my sales?
  • Can this expenditure be recouped or lead to a financial gain?
  • Can I directly measure this as positively impacting business efficiencies or processes?
  • Will this lead to increased sales and can this be directly measured?
  • Will this lead to increased productivity in any area of my business?

If you’re able to answer yes to at least one of these questions, the expenditure should be looked at as an investment rather than an expense. Common examples of investments are advertising and marketing, hiring, technology, training and development or coaching, courses or industry-related books and continuing education.

An expense, on the other hand, is an expenditure that is not leading to growth, productivity, or efficiencies and, if reduced in a smart way, would not negatively impact your business. A timely example of this would be a brick-and-mortar office. This could easily cost you thousands if not tens of thousands of dollars a month in rent, utilities, maintenance, insurance, etc. If you decided to make your office a virtual one, you could likely cut all those expenses and make your time more efficient.

What happens when you cut back on expenses?

When you cut back on unnecessary expenses, you increase your profits. In addition to the office example, I used previously, other ways to reduce expenses include:

  • Comparing rates on insurance, credit card processing, vendors, etc. and switching to a company with lower fees.
  • Cutting supply costs by creating a virtual, paper-free work environment.
  • Find new ways to offer client or employee/contractor perks that cost less but have the same impact.
  • Eliminate equipment you don’t need. Do you have a bulky copier or other pricey pieces of equipment? Many entrepreneurs lease expensive equipment they really don’t need if they just created a smarter work environment.

What happens when you cut back on investments?

When you cut back on investments, you may save money…in the short term. It’s a quick hit for business owners who want to see an instant transformation on their balance sheet. I’ve worked with clients who bring in billions of dollars in revenue but have decided to cut out $500 in online marketing because it was “too expensive.” Will this company see a positive impact on their balance sheet a month or two after cutting this “expense”? Sure. But down the road, this one small cut of an investment is likely to reduce their revenue by tens of thousands of dollars each month.

The moral of the story is, you need to spend money to make money as an entrepreneur—but you need to spend it in the right places. When you learn to recognize the difference between an investment and an expense, you can make solid financial decisions and build a business you can be proud of.

Want to learn more? Take my quiz to determine your profit potential and to see if working with an experienced coach is the right investment for you.

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