Balancing growth with stability is a paradigm that affects us all. Our entire economic system is based on growth — you must always be growing. However, that’s not always possible. Knowing how much to invest versus how much to save can be difficult to figure out for individuals. For business owners, the question takes on greater importance.
Funding Growth
They say you have to spend money to make money. If you own a small business, investing in its future might be the wisest thing you can do. Such investments mean being able to order more products to sell, to hire more staff to serve more customers, to open an extra location or to upgrade business software or machinery. Not investing often means your business will stagnate, which could mean getting left behind by more ambitious competitors.
Saving Money
They say you have to save for a rainy day. A business without a well-stocked emergency fund is one calamity away from complete failure. Maintaining a business savings account means having funds on hand for when sales are slow, when a burst pipe shuts down your business and when ill health means you can’t work for a while.
Allocating Business Funds
Funding growth and saving money are really two sides of the same coin. They’re both investing in your business’s future: one optimistic, where you grow and bring in more revenue, and one pessimistic, where things get hard and you need reserve funds to see you through.
Ideally, you want both. If your business is turning a profit, some of that money should go to funding growth and some should go into a rainy day fund. But how much goes into each?
Here are some strategies and factors to consider:
Don’t Wait To Invest in Growth
Fledgling businesses often invest heavily in exciting operations, such as branding or office/store setups. This can be fine, but it often comes at the expense of core activities that drive growth. Focusing on pursuits that provide tangible benefits, such as customer acquisition, market research and product development, will likely provide a better basis for growth.
Understand Cost Structure
It’s important to break down expenditures into fixed and variable costs.
- Fixed costs include rent, staff wages, software subscriptions, taxes, etc.
- Variable costs include commissions, inventory, fuel, etc.
No costs stay fixed forever, of course, but fixed costs change much less frequently than variable ones. A healthy balance between the two gives businesses flexibility.
Set Realistic Revenue Targets
A bad budget can mean no funds for growth or savings. Overly optimistic revenue projections leave little room to withstand shortfalls. Always err on the side of under-projecting and establish a buffer for unexpected costs.
Here’s a helpful strategy to follow: Plan for 80% of expected revenue and 120% of potential costs.
Helpful strategy number two: Amass an emergency fund that can see your business through six months of zero revenue. Once you have six months’ worth of costs in reserve, then you can fund all the growth you want — just make sure to include the value of added costs to your emergency fund as you scale up.
Ready To Grow — Safely?
Every business is different. Want to know the right strategy for yours? Contact a Vectra Bank professional today.
