Spend or withhold? When should you spend? And how much?

Spend or withhold? When should you spend? And how much?

I will raise more questions than answer in this post.

Spending extravagantly is not good for a small business. That is clear in my mind. I have seen more businesses that spent liberally struggle, fail and die than ones that have controlled their costs. This is true even if you have venture funding. The funding will only last some months unless you can earn revenue commensurate to the expense.

Spending is easy. Earning revenue is difficult. And it takes much much longer than we anticipate. The reason why we have to stay tight with the cash is that we don’t know how long we have to wait to earn revenue. And

waiting costs money – to keep the business relationships alive; to pay salaries, rent, utilities bills etc.

The case for thrift is the easier one. The more difficult question is when should you loosen your purse strings and by how much? There is no one answer to this question. Each of us small business persons has to decide on our own based on the circumstances we face.

However, there are a few aspects that are currently helping me:

1. Know the right time to spend; experiment in small amounts and confirm that it works before spending large sums

2. Keep a reserve – enough to survive about 6 months. The reserve is untouchable; you can only spend the reserve if you have gone out of all other options

I am not among those who believe that they can leverage (take a large loan) and take big risk spending it. If you do that, your business becomes a hit or a miss. It is a decision you have to make if you want to do that.

What are your thoughts on this topic? How have you benefited or lost because you have chosen to spend? How did you make those decisions?

Spend or withhold? When should you spend? And how much?

About the author: Chaitanya Sagar is an expert in small businesses and is the CEO of www.p2w2.com, an online marketplace for services like writing, business consulting, research, software, online-tutoring etc. You can find good service providers and collaborate with them on p2w2.

Picture credits: Night Star Romanus iChaz

6 Replies to “Spend or withhold? When should you spend? And how much?”

  1. Chaitanya,

    This is just one part of the problem. I think the biggest problem facing small businesses is that they are unable to get their receivables on time from their clients, so that they can pay back the banks on time too. I have seen several small businesses failing because of this. The working capital is too little to sustain them for even a few months.

  2. Expatguru,

    Thanks for a thoughtful and timely comment. I see where you are coming from. However, this post was written in an entirely different context – when a small business is about to decide when and how much to spend, which makes all the difference to the culture of the company it is about to establish – this post is set in that context.

    I see the context in which you wrote comment and empathize with the small businesses that are unable to raise working capital loans.

  3. hmm interesting article

    Cash flow is the king. In Small Business your monthly revenue has to meet the expenditures, personal resources dont last long. There will be delay in payments and that needs to be accounted for while preparing your cash flow sheet.

    Also as Chaitanya rightly pointed out that you need to have a cash buffer for 6 months.

    Carrying that thought forward – how to create that reserve – there are good times when you have done an intense payment follow up and you find a surplus available, this is the moment when you have to limit the cash reserve in your normal transaction bank account. It should just be sufficient to meet your current and next month dues.

    Rest all should be parked in a different account, and treat that as a reserve account/ expansion savings / future investment.

    This is one of the practical tips that I follow, so I dont feel that there is luxury of available cash.

  4. Across most business functions it is relatively straightforward to adopt this thrifty approach and one to maintain not just at start up but throughout the life of the business.

    However, some real clarity is needed when it comes to marketing expenditure. In the start up phase undoubtedly marketing spend will not relate to sales as you don’t have any. It is also potentially the first to be cut when cashflow is in trouble.

    It is important to be true to your marketing strategy, make sure it is well funded before you start and ring fence the cash to ensure that you can see it through.

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