Starting a new business or growing your existing business takes capital. You may need equipment, furniture, systems or servers, office space and personnel. Where do you get this capital? More importantly, how do you spend this capital wisely to maximize the return on your investment?
The answer to these questions will not only impact your profitability, but may also determine whether you are successful in differentiating your small business from your competitors and increasing your productivity for the long run.
First, you need to determine how much capital you need and what your return will be on expenditures. A business plan is an essential first step. The Small Business Administration website1 has free tips on creating a business plan.
In order to calculate your capital requirements, enumerate what are essential expenditures and where you can save money and preserve cash flow. For example, will the outlay increase profitability and improve your company’s competitive positioning? Will this be a short-term or permanent expense? Do you need to update services, products or systems? Is this a good time to move or enlarge your office space? Perhaps you are ready to add new hires.
Estimate the net cash each investment will generate, allowing for variables such as increased working capital, changes in taxes, adjustments for noncash expenses, etc. Putting the cash flows on a calendar will allow you to estimate returns year by year or even month by month.
You may find that your business will get the biggest return on your investment by spending money on the following
- Professional accounting and legal assistance, including tax preparation
- Professional design services, from business cards to the look of your website and your logo
- Outsourced IT services
- Marketing and branding
- Education and training
- Upgrades to improve customer service
Of course, the amount you spend and the priority ranking of each expenditure will be determined by the variants of your specific business, how long it has been operational, and the amount of cash available.
Next, you need to calculate how much you can afford to spend and what you expect the return on your investment will be. If you invest in that new accounting software, you may recover the cost quickly in reduced debt and employee time spent chasing those outstanding receivables. If you purchase that new Customer Relations Management tool, you may recover the cost quickly with increased revenue from sales and more satisfied customers. If you invest in a more professionally-designed web site, you may attract more customer traffic.
If your business is profitable, you may have more leeway in your cash outlays. That does not mean you should be throwing your profits away! Utilize free or low- cost social media in your advertising and marketing, and refrain from investing in the latest technology until the cost comes down.
Next, consider the cost of your financing. Is it more cost-effective to lease rather than buy office equipment? Maybe you should sell old equipment that has outlived its useful life. Are the current low interest rates more favorable to purchasing new office real estate? Would the purchase give you a competitive edge over rival businesses? What is the cost of the investment, not just in dollar terms, but in opportunity cost as well? Perhaps you should restructure your existing debt and refinance at lower interest rates. Remember to review your decisions and your priorities on a periodic basis, at least every year.
Once you have decided which investments to pursue and their estimated return on investment, talk to your business banker for the best financing terms. Nevada State Bank is a Preferred SBA lender, and can offer low down payment terms and rates for real estate purchases, business lines of credit, term loans, and equipment leasing.2
Bottom line? It pays to invest wisely in your company to maximize your investment.
2. Loans subject to credit approval. Terms and conditions apply. See a banker for details.
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank, a division of ZB, N.A.