Is Frugality a Virtue in Business?

In this economy, every business owner wants to minimize costs and maximize profits. It’s instinctive to look for ways to spend less money by cutting costs, cutting out whole line items in the budget, to be sure critical expenses, like payroll, can be met.

However, for small business owners, entrepreneurs, even sole proprietors; that approach is often ‘pennywise and pound foolish’. Too many small businesses, have wiped out their marketing budget, their training and self-development budget, never mind the small expenses to keep their guerrilla marketing efforts moving forward. Too late they realize, their sales funnel is empty because without marketing, no one knows what they have to offer, or even that they are still in business.

You need to look at those marketing and sales expenses differently. Marketing and sales are profit-generating investments you make upfront to drive sales. There’s a big different between: a. spending your entire investment budget on a onetime 30 second spot on the Superbowl or the NBA Playoffs(I know someone who did!), and b. a strategic marketing budget laid out for the year and tracked, so you can make adjustments in response to the market. In a tight economy, I would forgo the former and persist with the latter.

Where frugality is a virtue in dealing with your personal finances, it is very often a vice in business finance. If you allow frugality to undermine profitability, your business will move in the wrong direction. Don’t let it.

In contrast to your household, your business must spend money to make money. In business, you want to think about how you invest money, where you invest money. You need to ask yourself the question all the time, “Is this a wise investment for the business?” The ROI principle I use and that I show clients too, is the Rule of Three.

The Rule of Three: Every dollar you spend in your business should return three dollars back to your bottom line or more.

Too often, and I made this mistake for years myself, small business owners try to live hand to mouth, with sales that just cover this month’s expenses, which is the Rule of One. You hear it in sales pitches all the time. “All you have to do is get one client (sale, contract, gig) from this newspaper ad (website banner, SEO campaign, etc) and it will pay for itself.”

OK. So the ad pays for itself; ‘spend a dollar, make a dollar’. But that’s not enough revenue to cover expenses, never mind grow your bottom line. When you succumb to the Rule of One, you start down the road of working very hard and not making any money to show for it.

Here in Westford, we have the distinction of being the only town to ever stop Walmart from moving in. One of the critical arguments was that Walmart would wipe out the entire retail industry, all small businesses. Walmart can do very well on a much lower profit margin than the small businesses.

Small business in general requires astute leveraged investments that consistently produce a greater yield to the bottom line. Know your numbers and track the results to be sure you do get the return you need.

When you apply the Rule of Three, you spend a dollar to make three dollars back. That’s how you can ‘spend your way to prosperity’.

So in your business, if you use the Rule of Three for expense or purchasing decisions, in what way could you spend a dollar that will make you three? In what ways could you spend $1000 that will return $3000?

The easiest place to start is with existing clients. Spend money on clients and do things for them that they don’t expect. It builds loyalty, longevity, repeat business and referrals. Cementing current client loyalty is the easiest, fastest way to win new business.

Simple frugality or thrift can be the demise of your business. Instead, use the Rule of Three in every strategic decision. You’ll make better investments. Your business will prosper in this economy and beyond.