You’ve heard the saying “It takes money to make money.” Business owners and entrepreneurs sometimes use this shopworn truism to justify throwing money at perceived business problems. Overworked? Throw money at staffing and outsourcing. Business inefficiency? Throw money at productivity solutions. Sales are flagging? Throw money at advertising.  This isn’t always the best strategy. Some entrepreneurship problems cannot be solved by throwing money at them. Other times, saving money is the better strategy.

When is Saving Money the Same as Making Money?

In some senses, it’s basic math. Let’s say your business owes a $1,000 payment on its business loan. It has $1,900 in outstanding receivables, but $1,000 payables, for an expected profit of $900. That’s a $100 shortfall. To make your loan payment, you need to come up with $100 in cash. Otherwise, you’re in default, facing bankruptcy, and out of business.

What to do? You could:

• Find a way to generate $100 in revenue, quickly.
• Find a way to cut $100 in costs.

In this case, saving the money vs. generating the revenue has the same outcome—your business is saved.  Moreover, identifying savings is probably the easier than trying to close more sales at the eleventh hour. Any business can have a slow month of sales, but how much you spend is almost completely under your control.

How Much is your Business Worth?

Many business owners are too invested in and busy with their company to envision a future where they might one day sell their business. However, smart entrepreneurship begins with the end in mind.  Suppose some hotshot came knocking on your door, offering to buy your business. How much would you ask for? How do you know if his offer is fair?

The value of a business depends partially on the company’s assets and liabilities (property, equipment, loans and payables, etc.) but another big factor is the seller’s discretionary earnings (SDW).  SDE gets complicated as the accountants sink their teeth into it, but at a basic level it represents your company’s ability to earn profit. Every industry has a multiplier that gets applied to your SDE. The logic is, with this unifying multiplier, you can say that a business in your industry that makes $XX profit has a sale price of $XXXX.

Example:

Let’s say that the business community agrees that your industry has an “SDE Multiplier” of 3.  Let’s also say that you close enough sales to increase your annual revenue by $1,000 without incurring any extra expenses.  Your SDE has increased by $1,000. Multiply that number by your multiplier, and you can find out how much you increased the value of your business.

$1,000 x 3 = $3,000

Now suppose you didn’t close any new sales, but you found $1,000 in savings you can apply every year, without losing any sales. By saving that money, your SDE still goes up $1,000! You added that same $3,000 to the value of your business solely through savings, without closing another deal.  Thus, by saving money in your business you are actually adding to your net worth as the owner of the business, because your business becomes worth more as a sellable asset.

Where to Look for Savings

• You could hire someone to do your invoices and proposals … but an inexpensive invoice- or proposal-generating app like Dubsado or Proposable could allow you to do it yourself with the click of a button. Some of the software has a learning curve, but a freelance expert could potentially get your automation set up for a fraction of the cost of a full-time employee.
• Many paid apps are excellent end-to-end solutions. However, if you only need one or two of the features offered by the paid software, a freeware version is almost certainly available. Even staple software solutions like MS Office or Adobe Photoshop have free versions, including cloud-based SaaS solutions like Google Drive and Canva.
• Meetings tend to burn employee time. We’ve all sat in a meeting where we got all the information we needed in the first five minutes but the boss wouldn’t let us leave. Trim this fat from your business with communication tools like Slack.
• Some employees need supervision, but others can stay on task at home, while enjoying the benefits of no commute and lunchtime in their own kitchen with their families. The more of these you can cultivate, the less you spend on office space, dramatically cutting your costs.
• Businesses can save big-time on everyday expenses by accessing publicly available discounts and codes. You don’t have to burn time clipping these coupons, either. Free browser extensions like Honey scan the web for coupon codes and apply them automatically
• protect the environment with a cloud-based document management system. Going paperless also saves you the costs of printers and replacement toner, as well as the space required to store the documents and management tools.
• Getting bulk discounts may impact your short-term cash flow, but the reduction in your SDE could boost your valuation to the next level and provide you breathing room down the road.
• Don’t assume the first price you are quoted is the final price. See if you can work out a deal while fostering a fruitful business relationship.
• Smart thermostats, fluorescent light bulbs, and window shades may represent a one-time cost that saves you big on utilities, drastically increasing your SDE for the long-term.
• Look into refurbished printers and computers, used office furniture, DIY decor, etc.

When Saving Money is NOT The Same as Making Money

Here’s another expression—“Don’t trip over a dollar to pick up a penny.”

Smart spending grows your business—builds your brand, generates more sales, etc.  Choosing freeware vs. paid software is the perfect example. If you need all the functions of a premium software solution, it’s probably worth paying for it. You might be able to find four different freeware solutions to perform all the same functions. However, if you and your staff burn time juggling the four freeware solutions, none of which integrate with each other, the savings wasn’t worth it. You end up burning valuable time that could be used to grow your business

You might balk at buying a $1,000 software solution, but if it increases business efficiency enough that you can close $10,000 in new business, it would be a big mistake not to make that $1,000 investment.

About the author

From selling flowers door-to-door at hair salons when he was 16 to starting his own auto detailing business, Brett Shapiro has had an entrepreneurial spirit since he was young. After earning a Bachelor of Arts degree in Global and International Studies from the University of California, Santa Barbara, and years traveling the world planning and executing cause marketing events, Brett decided to test out his entrepreneurial chops with his own medical supply distribution company.

During the formation of this business, Brett made a handful of simple, avoidable mistakes due to lack of experience and guidance. It was then that Brett realized there was a real, consistent need for a company to support businesses as they start, build and grow. He set his sights on creating Easy Doc Filing — an honest, transparent and simple resource center that takes care of the mundane, yet critical, formation documentation. Brett continues to lead Easy Doc Filing in developing services and partnerships that support and encourage entrepreneurship across all industries.