The Frugality Profitability Continuum

By Michael Buzinski

An explanation of the Frugality Profitability Continuum.

I’ve been known to say, “people either have more time than money or more money than time.” As business owners we invest both every day; from the conceptualization of our company to the day we sell it. During the startup process, we are often underfunded and left to DIY most everything which blurs how we value time and money. Frugality becomes essential to survival and thus everything is considered an expense rather than an investment. This creates what I call the Frugality Profitability Continuum. Let’s look at how the two distinguish themselves.

Frugality

There is no question that frugality is the key to success when running any business. This is especially true with small businesses. There are people who will tell you that, “if you’re not a frugal person, don’t go into business for yourself.” While I agree with this line of thinking, I also think there is a difference between frugality and being cheap.

Cheap is defined as getting something worth more than its cost, but we all know you get what you pay for. Usually, something that is priced too good to be true will cost you either quality, time, or both. Broken down to the granular level, sacrificing quality ultimately costs you time, and time is an irreplaceable commodity. To business owners, time is also money. So in the end, it is safe to say that being cheap can actually cost you money. But what if we were to look at every business expense as an investment? Would that change our perspective and thus spending habits?

Profitability

As entrepreneurs, we look at investments with one thing in mind: Return On Investment (ROI). Looking at all business expenses as investments give us a barometer that tells when to question cost over return. For example, I used to think that if I were offering coffee to my employees, it was okay to buy instant coffee because one, I didn’t drink coffee so I couldn’t see any value in high-end coffee and two, I was providing it above and beyond my employees salary out of the kindness of my heart. In short, if they didn’t like it, they could buy their own. I eventually came to realize, that investing a couple more dollars each month on higher-quality coffee paid better dividends than the cheaper alternative because they drank more coffee throughout the day, ultimately making them happily more productive.

Profitability is the driving force of every business and looking to your expenses to see which are better investments than others is an ongoing challenge. It does get easier over time as you start to realize patterns, both positive and negative.

Finding Balance

The Frugality Profitability Continuum creates a struggle for many entrepreneurs. Unfortunately, there is no easy, overarching answer that dictates when and where it is appropriate to be more frugally minded versus profitability minded. I deal with this dilemma in marketing on a regular basis. Business owners come to me with grand ideas of how they want to portray their brand. We all get excited about how wonderful the end product will turn out and how profitable the campaign will be. But when it comes to investing the money it takes to do it right, they turn toward frugality, sometimes to the extent that they ignore opportunity costs, the loss of time, and ultimately the loss of profits. Herein lies the need for balance and thus the reason to evaluate frugality and profitability as a continuum.

The great thing about owning your own business is that you get the final say of how money is spent within your organization. Sometimes this can be overwhelming, especially for new entrepreneurs who don’t have much historical data to work with. But the choices you make today ultimately shape what your company will look like tomorrow. There is a lot riding on your decisions to be frugal or to invest. Your choices need to have a level of balance and understanding the factors that go into your buying decisions can help keep a good balance between frugality and profitability.

Here are a few factors that feed the Frugality Profitability Continuum:

Aesthetics: Some businesses rely on the aesthetics of their facility to promote the quality of their products. A good example would be a day spa. The entire point of the day spa is to escape into the lap of luxury. What impact would there be if the spa owner cut corners on the decor of their spa? Conversely, the level of elegance invested in is ultimately dictated by the sophistication of the client.

Functionality: A contractor can easily justify spending a seemingly exorbitant amount of money on something as simple as a hammer. It’s a simple matter of functionality in that there are specific hammers for specific types of work. But that doesn’t mean that I need an $80 hammer for my office to drive picture hanger nails into drywall. That’s why functionality is important to remember when dealing with salespeople trying to upgrade you to the next best thing. Establishing what functionality you need for the next tool you invest in can save you money in the end.

Longevity: How long do you need something to last in your business? When it comes to things like hammers, the longer the better. There’s a different story when it comes to technology. The speed of change in computing technology moves so fast that you may be able to get away with something that is only designed to last around three years.

I suggest against buying bleeding edge technology for most small businesses. Even though getting the utmost in the latest and greatest today might seem to give you a longer shelf life on new equipment, there is no guarantee you will ever benefit from it. You also have to take into account whether the newest gadget will be even around in three years; I give you Jazz Drives from the late ’90s are an apt example.

Reliability: Why is medical equipment so expensive? It’s usually because of the reliability factor doctors expect. Most patients are relying on that facet as well. You see this need in many other industries. But some industries invest in reliability because of the opportunity costs of instability during the production process.

An easy example is printers. When you buy a printer, take into account how reliable you need that printer to be. Businesses like legal offices rely heavily on their printers and when time is of the essence, that printer better always works. On the other hand, you may have a small business that can get away with emailing documents just an easily as printing them for clients. You still may wish to have a printer when clients request hard copies, but the reliability factor is much lower and thus, you can be more frugal.

Speed: How fast do you need something? Today, everyone seems to be in a rush, but that doesn’t always mean you need everything immediately. Take this into account when investing in equipment. How fast something produces is a direct factor in its cost. Coming to terms with what speed is the most profitable for your business can help reduce your upfront costs. For example, a restaurant owner may be looking at a new milkshake machine. The salesperson shows the owner a few options. One can make six milkshakes at a time, while the other only three. Even though there may only be a 25% cost difference between the machine, the owner should take into account how often will they need to make six shakes at a time. Does the added investment make sense?

The Final Balancing Act

No matter how you deal with the Frugality Profitability Continuum, you will always be deciding between money and time. Even though we established that time is money, please remember there is a distinct difference: You can always make more money, but you can never make more time. Ultimately, your life balance is what matters most. Isn’t that why you went into business in the first place? Take this into account as you move forward in navigating the Frugality Profitability Continuum.

Originally published at https://stories.buzzbizz.biz on January 29, 2018.