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Tuesday, April 2, 2013

4 Comparisons to consider before making expenditures

Evaluate spending to ensure you do not throw money away!

Some people are great with money and are able to save and spend in a manner that does not create financial problems.  Others are not so great and manage to amass large debt with little to show for their expenditures.  Many times those that are not good with finances run businesses in a similar manner.  Managing assets of a startup or any business is critical to the success of the business.  Many businesses borrow funds as a primary means of growing.  Managers of businesses should always give careful considerations to use of available cash or borrowing funds because the actions have long-term consequences. 

The goals of building a business are to make money; i.e., cash flow must turn positive.  Debt can make companies grow faster if used to make improvements that result in achieving greater earnings or turning cash flow positive sooner.  Debt has a potential tax advantage because interest may be a deductible item.  The long-term loan payments may create a burden on cash flow that escalates the company financial issues in times of reduced earnings. 

Companies sometimes have cash reserves.  The reserves help weather downturns or slow periods.  The decisions to spend versus borrow is one that should be carefully considered.  The following may help your analysis. 
Borrow versus Have:  Some purchases are beyond available cash assets requiring one to borrow funds to make the purchase.  Loans can be great until the cash flow crunch comes and the creditors are banging on your door to get their money back.  On the other hand, spending money you have in the bank can reduce reserves and cause cash flow crunches as well.  For example, not making payroll is a very demoralizing event.  Carefully evaluate all decisions of borrowing versus using cash reserves.  Estimate cash flows and ensure your ability to weather cash flow problems with and without a loan.

Want versus Need:  Some purchases are things we want but may not need.  A new phone with all the latest technology may be exciting, but the old phone may do everything required.  The same is true for most items where a replacement of functioning equipment takes place.  It is much easier to spend when the item is a necessity that will improve business and cash flow.  

Enjoyment versus Improvement: Aesthetic improvements can bring more customers or they make your employees happier.   Spending that creates enjoyment should translate to improvements in the business: otherwise, consider delays in the purchases.  Evaluate improvements in light of anticipated business improvements and increased earnings and cash flow. 

Short versus Long Cycle:  Some purchases are products that have short cycles causing them to become obsolete in a few years. Other items purchased have long and durable performance requiring minimal maintenance.  The cost and lifecycle of the items are worth consideration as to how they affect cash flows.  Try to make expenditures based on need, improvement, and earning improvements.