You've got to spend money to make money
CHARLIE HAGUE | OCTOBER 27, 2016
The concept of needing to spend money to make money has been one of the most abused expressions I’ve come across in conversations with inexperienced startup CEOs. This is NOT an expression that experienced professionals will use very often.
I’ve spoken with several inexperienced startup and early stage CEOs that are perhaps unclear of what this concept really means. This article is to help break down the meaning and hopefully help future startup companies make smarter financial decisions.
Starting a business is tough and requires a lot of time, energy and of course money. Typically, when a startup is born, it is funded by the person behind the idea and the friends and family. Which usually means there is not a lot of capital investment. This is why you have to make every dollar count.
The reason this “spend money to make money” concept is lost to many inexperienced CEOs is because of the excitement that surrounds startup. Every idea and every product thought up by a startup CEO is going to be the next big thing and going to make everyone involved overnight multi-millionaires. Also, for first timers or CEOs who have limited experience, they are typically going it alone without a board of directors to give oversight or good mentors.
The excitement, lack of experience and the emotion tied to the project are the usual suspects when it comes to spending money on unnecessary purchases. I had a CEO tell me that his company made purchases totaling several thousands of dollars for marketing at a company that had not made its first sale. After digging a little deeper, I discovered a small portion of that expenditure was for marketing materials to promote the company but the majority was spent on electronics and toys such as tablets and drones with the idea that it would make their company look high tech and successful and would draw attention to their company.
The justification was that they could use the expenses as a writeoff. The problem is, writeoffs and loss carry forwards only help you if your are profitable or if you stay in business long enough to become profitable. Keep in mind, writeoffs and loss carry forwards are accounted for differently based on the way you’ve structured your company. You will want to speak with your CPA or tax professional for advice on the best structure for your company.
The best way to look at "spending money to make money" is to set a strategic plan for your startup with measurable goals and milestones. Look at how much money you have available, how long will it take to go to market, what are your REALISTIC sales opportunities and creating a budget based on this information. Focus your attention on making investments that will directly impact infrastructure & sales or improve processes. This will lead to a real return on your investment.
The hardest part in startup is staying in control of your limited capital and understanding the differences between needs and wants. Although your dreams are the size of Pfizer and Google, your budget is not. That new Hummer with the company logo down the side is probably not the best fit at this stage in the game.
