The Right and Wrong Times for Spending

Small companies must be very careful when it comes to spending, because they usually have finite resources. There are definitely good and bad times to expand your business, having to do with your own goals and the state of the overall economy. When done with foresight, spending can grow your market share and increase your long-term profitability. However, if you mistime an expansion, you may cripple or kill your small business.

Some Interesting Stats

If you want to start up a one-person business, you are not alone. In fact, you’ll be one of 14 million single-person businesses in the U.S., according to the Census Bureau. Only 180,000 have multiple locations, while 5 million have a single location. Of these, you want to be among the businesses that survive and grow. That means starting off on the right foot.

Getting Started

First things first. You will be spending some money when you first organize your small business. Even if you are running an at-home business, you will need capital for computer and communications gear, website development and hosting, and perhaps inventory and special equipment. Your initial goal is simply to break even. If you are finding that difficult to achieve, you must evaluate whether to throw more money into the enterprise or to call it quits. If you feel strongly that additional capital would boost you into profitability, think about a short-term business loan, such as the convenient ones available from IOU Financial.

Expansion

Assuming you get over the initial hump, you will know it’s time to spend more money when you are constrained from making available sales, perhaps due to a lack of space, equipment, staff or inventory. For example, you might need to rent a commercial storage locker to hold your inventory, or perhaps you’ll need to lease office space and/or make leasehold improvements to the rented space.

What Do You Really Really Want?

It’s a bad time to expand your small business if you don’t want to take on the increased pressures and responsibilities that come along with growth. That means you have to be honest with yourself. Perhaps you are working at home simply because you can’t stand working in an office, hate hierarchies and cherish your freedom (your humble author included). If you are making a living wage this way, think twice about expansion, as it might completely upset your lifestyle and have you asking why you did it.

Assuming that you are an alpha type that really does want to expand, the next thing to gauge is the state of the economy. The wrong time to spend is when the country is heading into a recession. Inevitably, your business will slacken when the economy does, and you may be saddled with unnecessary and expensive capacity. Conversely, expanding at the end of a recession or the beginning of a growth period is great timing. Things are usually less expensive then, and you might be able to increase your size on the cheap. Interest rates may be lower then, so borrowing from a commercial lender as noted above can be very cost-efficient.

Things to Fret About

If and when you decide to expand, consider the following challenges:

  • Recruiting, supervising and paying additional personnel
  • The need for administrative services, such as bookkeeping, shipping, etc.
  • The logistics of a physical expansion, with all the costs this entails
  • The risk that the additional spending will not pay for itself in higher profits
  • The possibility of morphing into precisely the person you never wanted to be

There are millions of ways to achieve the American dream. You might need to spend money to get there, but knowing when and how much to shell out will depend on you, your market, your capital and the economy. Speak to us about increasing your capital and getting insights into your market and the economy. As for your own psychology, that’s up to you.

If you have a small business spending money on growth then you may be interested in learning why a small business loan might be right for you.  Learn more about IOU Financial and our loan offerings.

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