Anyone managing any kind of budget has surely come across a version of “You need to spend money to make money”.
Without any kind of guidelines or caveats, this can actually be a very dangerous statement.
Unbridled, that mindset could actually lead an organization to bankruptcy.
I would argue that we need to invest money to make money, and not all business purchases are an investment just because we really, really, want something. That desire alone doesn't turn it into an investment. Sometimes, it is just plain old spending.
As the year-end approaches, many business owners are having conversations with their accountants about taxes. And it might be tempting to try to reduce a business’ tax load by spending money. But it's important to take a moment to consider what that money will actually provide in return.
So, what can we do to help guide our thinking and help us make the distinction between year-end investing and year-end spending?
Consider whether there are things, items, etc., that you can pay for now that you would've purchased in January or February. Perhaps items that you were renewing, perhaps equipment or training. Elements that you would typically purchase in January or February but could also purchase in December.
Also think about what invoices you can pay for now. If you were going to purchase services or coaching in January perhaps you purchase it in December, and obtain and pay the invoice in December.
Focus on things you were already considering but bump that up a little bit.
Review whether there are any receivables that need to be written off. If there's been an issue with a client and now it's looking like it's going to become a bad debt that will need to be written off.
Resist the urge to just purchase things that you wouldn't have bought. Try to avoid the mindset of buying for the sake of buying.
Although it might be tempting to simply move all expenses into December and reduce our tax burden that way, cash flow might become an issue.
It's therefore really important to consider that aspect.
There's this really great quote by Michael Dell: “We were always focused on our profit and loss statement, but cash flow was not a regularly discussed topic. It was as if we were driving along watching only the speedometer when in fact we were running out of gas.”
Think about that for a moment.
If you're just looking at the profit and loss statement and thinking “We're plenty profitable, let's make these big purchases at the end of the year to help ease that tax burden” but really your cash flow is actually problematic because you haven't received all the invoice payments that you were expecting, you could run into issues.
It's like Michael said, if you're just looking at that profit and loss statement to make decisions on what to purchase, you may in fact be running out of “fuel in the tank”.
Make sure that you have the positive cash flow to sustain the purchases because it is crucial to the survival of the business.
If you don't have a positive cash flow, you are likely to run into trouble really quickly. Yes, you could borrow but that gets really tricky and complicated quickly. And, of course, it’s essential to talk to an accountant about all of this. But, for that initial thinking, consider these items because, again, if you only look at the profit and loss statement, it could provide you with a false sense of security. You may feel that you have the funds since the business is profitable, when in fact, your cash may actually be low.
And if you run out of cash to pay for your staff, your tools, your utilities, whatever else that you absolutely need to pay every month, that's going to become problematic really quickly. So make sure before you make any of these decisions on how to ease that burden and invest in your business at the end of the year, make sure that you know, that your “gas light” is not coming on saying that you are “low on fuel”.
Whenever making any of these types of financial decisions, I always consult with my trusted accounting team before implementing solutions.
They are the true experts when it comes to managing funds and taxes and all of that. And they work with so many clients. They are so deep into that expertise that they become invaluable in helping make these decisions. Do make sure that whatever plan you come up with, whatever idea you come up with, is shared with your accountant. They are so valuable and, unfortunately, underutilized for some reason. There are business owners that think these individuals just do taxes and books and they don't consider them true partners. In my experience, they are partners. We collaborate closely and I keep them informed of all kinds of things and run all kinds of ideas by them.
It’s also beneficial because they can share things that they've seen others do. Of course, it's anonymized, they're professionals. They won’t share what their clients are going through and who their clients are. But they can share generic, sanitized information, solutions, tips, and ideas.
Another aspect that I find extremely useful in working with these professionals is to check my assumptions. At times, I might be tempted to convince myself that I really, really, really need this and here's why. And they might start poking a little bit. Ask whether I really do and why. And so they might put a hole in my argument and make me realize that perhaps I’m rationalizing. Which of course would lead to spending money instead of investing money in my business.
Therefore, it's essential to have that person providing you with that feedback. Of course, it's also essential for you, as a leader, to be open to actually hearing that feedback, as opposed to only be wanting for them to tell you what you want to hear. That's not useful. Let's take advantage of those amazing resources and collaborate in a true manner in finding things that would actually be investments.
And so, as you're working on budgets and tax predictions this year, make sure that you get the right support and you continue to aim for year-end investing and not just year-end spending.