Do you have to spend money to make money?
It’s an age-old question, but I think it may be the wrong question. It can lead us in the wrong direction and get us focused on the wrong things. So let’s take a lot at this question, try to answer it, and also answer all the things it’s NOT asking.
The simplest answer here is “yes.” Any business needs to invest in itself in order to grow and profit. The industry will determine how much you need to spend, but investing in the business is going to be necessary.
So, is it good to spend more?
Will that mean you make more?
You may have noticed that the question is about spending but I keep using the word investing. I’d like you to consider shifting your mindset toward investment. When we focus on spending, it either feels like something to avoid at all costs (pardon the pun) or something we have the luxury of doing because we’ve finally “made it.”
The truth is, for firms to be successful, they need to move from spending to investing. No self-respecting investor on Wall Street would invest without first considering the return they’re going to get. They’ll do their due diligence to make sure they’ll get more out of the investment than they put in. They’ll also make sure they’ll get a better return than they could on another, equally risky investment.
To build a thriving firm, you need to use that same investment mentality when it comes to spending money. Spending blindly isn’t a good strategy, but neither is pinching pennies. It’s all about the profit you gain by investing.
Take advertising, for example. If you never spend a penny on advertising (or buy the cheapest ads where you’re ideal clients won’t even see them), you’re not going to get a good return. You’re going to miss out on potential clients and end up with far less profit than you could’ve had. It feels like you’re saving money but you’re actually losing it.
What if you spend a ton on ads – TV commercials, billboards, and bus benches? Hopefully, you bring in more additional profit than you spend on the ads, so you’re getting a return on your money. But do you know which ads are bringing in that money?
Chances are, some of your ads are very profitable, some are breaking even, and a few are duds. When you know which are which (because you track the return you get on your expenses) you can cut spending on the losers and reinvest that money on the winningest ads you have. When you do that, you can see your profits explode!
So, let’s look again at our question: Do you have to spend money to make money?
The real answer is, you have to spend more on the right things and less on the wrong things. You have to have accounting systems in place to help you know the difference so you can invest wisely in your firm.
Those systems may be the best investments you ever make.