How to prioritize the costs of growing a business
September 27, 2017 |
The C2FO Team
There are plenty of places a growing business can invest its money, but not enough money to do it all (well, not all at once, anyway).
You may need to invest in:
- Equipment, technology, machinery
- Human resources
- Marketing and sales
- Materials and inventory
- All of the above
With limited capital, how do you decide what to prioritize? There is no “one size fits all” prescription to follow; the answer will vary depending on your business, your industry, and your goals.
The following steps can help you make the best decision for your business.
1. Develop a strategic growth plan
Some businesses grow at a slow and steady pace. Others find sudden, increased demand forces them into rapid growth mode.
Whichever category you fall into, your first step to prioritizing spending is creating a strategic plan.
Start by identifying the biggest stumbling block to growth. For example, perhaps there’s so much demand for your product that production can’t keep pace.
If you expect this level of demand to continue, investing in new machinery and equipment should be a higher priority than investing in additional marketing.
On the other hand, suppose your business is running smoothly and you’re currently meeting demand for your product with ease. You’re ready to take it to the next level and grow your customer base.
Before investing in additional machinery and equipment, you’d want to invest in marketing to build awareness and increase demand.
2. Use the ICE method (Impact, Cost, and Effort) to prioritize spending
- Impact: What impact will this investment have on your business? Examples might include greater productivity, improved brand awareness, cutting costs or increasing sales.
- Cost: How much will this investment cost, and how long will it take to recoup the investment?
- Effort: How much effort is required to implement this investment? For example, if you update your manufacturing equipment, will you need more employees to operate it? How much time will it take to retrain your employees on the new tools?
The ICE system uses a numerical matrix to assess the priority of an investment. Essentially, you rank each investment high or low in terms of impact, cost, and effort.
Based on numerical values, you prioritize the investments that make the greatest impact for the lowest cost and effort.
ICE can eliminate biases and help you make more objective decisions. However, you still need to consider some subjective factors. For instance, what effect will a particular investment have on your customer service?
Customer satisfaction is key to success, so you must prioritize growth investments in a way that won’t disrupt the customer experience.
3. Manage costs
For most growing companies, generating additional revenue is more important than reducing costs. But don’t neglect cost management altogether.
Assess your business’s operational efficiency, looking for ways to streamline processes, automate tasks or eliminate redundancy.
Then build those changes into your operations so you continue to keep costs down.
4. Keep an eye on your competitors
Are they launching new product lines, hiring more employees or doubling their marketing efforts?
You can’t base your investment decisions solely on copying your competitors, but you should take their actions into account.
If your competitor just doubled their sales team, for example, you may need to add salespeople or lose market share.
5. Stay up-to-date on economic and industry trends and projections
According to the most recent Deloitte CFO Survey, CFOs are spending more time than ever following current events.
Larger trends can help guide your investment decisions. For instance, if a sustained surge in fuel costs is projected right before you buy new vehicles for your fleet, spending more on “green” vehicles might save you money in the long run.
6. Monitor results
Track the return on your investments carefully.
Is your new equipment boosting production to the projected levels? Did adding salespeople help you land the expected number of new accounts?
Also, keep an eye on cash flow to ensure you have enough capital to achieve your growth goals. If you spot potential cash flow problems, you can take steps to boost income, such as accelerating payments from customers.
Prioritizing investments in a growing business is an ongoing balancing act, not a one-time decision. The approach above can make it easier to make the right decisions.