Business Expenses: How to Approach Them With an Investment Mindset
Lately, I’ve been fielding a lot of questions from clients around a specific topic: expenses. Most small business owners know they can deduct legitimate business expenses to lower their taxable income, but sometimes that drive to reduce their tax bill leads to making a wrong choice.
That’s why I counsel my clients to approach business expenses from an investment mindset by considering the expected return. Here are a few questions that can help you get into that mindset.
Is this business expense necessary?
There are some categories of business expenses you have to spend money on. Others might be “nice to have,” but not necessary. It’s okay to spend money on things that are nice to have in your business, but you also need to keep your financial priorities in mind. Even small expenses can add up quickly, so make sure every purchase is important to your business.
What is my expected return on investment?
When you invest in your business, you should expect to benefit from the purchase. Some possible benefits include:
- Boosting revenue. Investing in a tool that will increase revenue is usually a good idea, but compare the cost to the expected return.
- Reduce other expenses. Will the expense decrease costs in another area and help you reduce costs overall?
- Increase efficiencies. If you expect the expense to save time, consider how you’ll spend the time you save. Do you simply want more time off? Or will you use that increased capacity to increase revenues or move your business forward in another way? It’s certainly acceptable to invest in tools and services that will help you spend less time in your business, as long as you understand that it comes at the cost of increasing your expenses.
Is there a less expensive/more value option?
There are some categories of expenses where you don’t have much control over how much you spend, such as insurance, utilities, or interest on a loan. However, in other categories you may need to choose between a less expensive option that will meet your needs or a more expensive option that will provide better value in the long run.
Say you’re choosing between options A, B, and C, with A being the most expensive option and C being the cheapest. The least expensive option isn’t always the best decision. After considering all of the factors, you may decide that A is the best option because it has a bigger expected return on investment. Conversely, you may determine that the bare minimum will meet your needs.
What happens if the expected results don’t pan out?
Even the most carefully considered decisions don’t always pan out. If you invest in a tool that doesn’t have the desired result, when will you decide to pull the plug? And will throwing in the towel come with additional costs?
Recently, a client came to me with a question about a software subscription they were considering. The software would be useful in their own business, but they could also sell it to clients and generate commission revenue. The problem was, it was an expensive subscription and required a three-year commitment
That kind of decision is very different from one in which you can try a tool out for three to six months and cancel if it doesn’t work out. In this situation, you might decide it makes sense to pay more per month in exchange for the flexibility to cancel the contract if it doesn’t live up to expectations.
Whatever you decide, you should review your expenses regularly and consider whether the areas you’re spending money on are still necessary. Ideally, you’ll do at least a cursory review every month, but at a minimum, you should review your business expenses every quarter to determine whether the money your spending matches up with your business goals.
Do you need help deciding whether an expense is a good business investment? Schedule a call with me! I can help you run the numbers and make better decisions about where you spend your hard-earned money.
