What do you do with your hard earned money? Do you invest it in the stock market, buy property, spend it on renovating your house, a new car, going overseas or do you just keep it under your mattress for a rainy day?
In last month’s article I wrote about motivating business owners to grow their businesses and setting achievable and measurable goals in order to do this.
This month I would like to talk about re-investing in your business in order to supplement the process of growing it that I spoke about last month.
Your initial investment
As a business owner you may very well have been through the process of investing money in the initial opening of your business. It may be that you had made money in a previous business venture or had inherited the money or received it as a gift. It may even be that you went to the bank with a business plan in order to get a loan and are still paying it back.
The money that you initially invested may have been to open a brand new store with the bulk being spent on equipment, shop fitting, lease deposits, opening stock orders and the like. Alternatively you may have bought the business as a going concern from someone else and the money pretty much went into their pocket.
At this point I want to talk about re-investing money in your business as a periodic but ongoing activity. For many, having to spend money on business expenses is often seen in a very negative light as they would rather put the money into their personal bank account. However, if you are in a position to spend money then it is a very privileged position and this should not be taken for granted because if it is done properly then it will come back to you many times over.
If money is not re-invested back into the business then the business will deteriorate over time, just like a motor car or house.
Use the right funds
Before we go further I would like to clarify that I am talking about re-investing profits. For example, it would not help to spend R200 000 on revamping your salon when you have not paid your salaries for the month. Therefore the profit accumulated each month and built up over time is what I am referring to.
This may mean that, as the business owner, you need to choose a fixed salary per month in order to separate out your profits from your own salary/drawings.
Once you have done this it would be prudent to then put aside / save up to have enough funds to cover your monthly expense budget for a period of 3-6 months. Put this in a place where you do not have easy access to it and where it generates some reasonable interest. Then forget about it for the meantime – apart from adding to it if you are able.
Once this has been done we can start to look at profits that can be retained, re-invested and paid out to you and any other partners in the business.
This approach is less glamorous for owners in the short term but over time will bring a measure of sustainability that you will not regret.
What to spend money on?
Have you ever seen the movie Brewster’s Millions? It’s a movie released in 1985 starring Richard Prior and John Candy. Richard prior plays a character called Monty Brewster who is a minor league baseball player who finds out he has a very rich uncle who has just passed away. In his will the rich uncle says that if Monty is able to spend $30 million dollars in 30 days and not have any assets left over to show for it then he will inherit the real prize of $300 million. The catch is that he is not allowed to give the money away nor is he allowed to tell anyone what he is doing. He soon learns that this is far more difficult than initially expected and grows to hate money through the whole experience.
The challenge he kept facing was that he kept ending up with things of value through his purchases and in order to achieve the goal he really had to squander money.
The point is that spending money often leads to return on investment if done properly. The goal of your exercise should be therefore to spend money and always get return on your investment, the opposite of Monty Brewster’s goal.
The first thing to do is try and get rid of any debt that you or the business may have as this will work against your other investment efforts especially if you are being charged interest. If you have a loan from the bank, for example, then try and get this paid off as quickly as possible as it will not only save you in interest fees, but it will also mean that they are less likely to end up foreclosing on you if things go badly later, which leads to a whole host of new problems including limiting your ability to get finance or open a new business in the future.
Consider your current location. If there is an option to buy then see if this is a feasible option for you. If it is then you will end up with an asset that appreciates in value over time. It will mean that your rent payments become bond payments, which are being poured into your own asset. It also means that if you end up moving or losing your business you still have an asset that can either be sold or used to generate further rental income.
Look for ways to spend money on any infrastructural improvements that will enable your business to operate more efficiently. This could mean getting extra phone lines or a proper PBX phone system. It could mean investing in computer equipment and software or improved security systems in the salon.
Web & Email
Perhaps you need a web site or improvements to your existing web site. If you only have a free webmail email account then perhaps it is time consider getting your own domain name registered as this will have greater marketing value for you.
Clients are an excellent investment. Find effective ways to do marketing. This could be anything from advertising to gift vouchers to loyalty schemes. It could mean that you do some market research in order to be better positioned to take market share.
Re-invest in your stock levels and use the opportunity to negotiate with your suppliers to either give better discount or provide more support for their brand at point of sale.
Consider if you need an upgraded brand in store or whether you need to diversify by offering a greater choice of brands.
Consider the use of space in the salon and whether it could be used more effectively. Also consider the state of the current shop-fittings and whether they need an upgrade.
This is probably one of the most important areas but also the most difficult. Invest in your staff members. Ensure that they are sufficiently motivated by their earnings. This could be in the form of monthly salaries or it could be in the form of bonuses, profit shares or overseas trips.
Spend money but be thrifty
When you do the exercise of consciously spending money on your business always try and identify what the best available product/services are and then try and find a way of getting them more cost effectively. But remember that you are investing and if doing something cheaply will forsake return on investment then it may be better to pay the asking price.