How To Spend Your Money

By Deborah Rechnitz CMA CMC

It never seems to be a problem spending money in your business. Frequently, in fact, it seems to flow like water and the tap is open all the way. There is always equipment in need of being fixed, past due bills to catch up on and new ideas to try out, but there is also a limit to the amount of money any business has to spend. How do you choose where to put your limited funds?

Consider Your Options. In most cases you have no choice. You pay your operating costs first. You pay your payroll, taxes, rents, utilities, and hopefully you pay yourself. When things are very tight, you pay the vendor who screams the loudest or threatens to cut off your current shipments. Sometimes, if you’re lucky, there is money left over. We certainly hope so. But when there is something left over after paying all of your operating expenses, what do you do? These are the funds that create the nice problem to have.

Your options break down into three categories.

1. There is the needed repair and replacement category.
2. There is, hopefully, a need to accommodate expansion.
3. You could increase operating costs.

Each of the above options are valid, even #3, although it is infrequently considered to the detriment of many operators. Choosing the right category or categories is the real challenge.

Repair and replacement seems simple enough. You have an old cleaning machine. You’ve spent more and more time and expense fixing it lately. You’ve had hours of downtime, frequently on a Monday, and found it difficult or even impossible to meet customers’ deadlines. You’d love to just replace it with a newer model - $60,000 and you can finance it.

Option #2, expansion allows you to reduce bottlenecks in your plant. Bottlenecks can cost you in increased overtime, iN missed deadlines, or in non-productive labor just waiting for the bottleneck to clear up. For example, a new dryer can reduce wait time, tighten up your lot system and complete the end of day work much sooner. Expansion could also mean adding a new location and increasing your sales or just adding a route delivery vehicle. $5,000 - $10,000 and you can finance it.

Both of the previous examples, repair and replacement and expansion all deal with capital equipment. It is fairly easy to see and sometimes even calculate the return that these fixed assets will have on your business. If you spend $3,000 a year on repair costs for a cleaning machine and a new one costs $60,000 it will take 20 years to recoup your investment. If, on the other hand, your repair costs are $10,000 a year, if you count the overtime that is worked to play catch up, it only takes 6 years to recoup an investment. A simplistic example, but it gives you the right idea. Add on the aggravation that down time costs you in lost customers and you become motivated to spend the money, plus you can always lease it, right?

Finally there is the option to increase operating costs. This is an option that is rarely considered. It could be a one time expense or an on going expense. It usually cannot be financed. It does not result in a hard asset that you can point to at the end of the day. For all of these reasons we do not consider increasing operating expenses as a way to improve the business, but it may have benefits which far exceed a new piece of equipment or a nice new truck.

An increase in operating expenses may include increasing your advertising costs. Spending more dollars, hopefully cost effectively, will provide you a good return in terms of higher sales volume. You can, in fact, measure your return and, today, generally get a better return in this area than most replacement equipment will ever give you. Spending more on your employees in terms of higher wages or health benefits to reduce turnover and improve recruitment efforts is another area worth considering. Spending on a new plant layout to reduce labor cost, improve air flow and work flow efficiencies may be a one time expense with a continuous return. Examples of such investments may cost between $5,000 - $25,000. When these items are considered the statements are “how can I afford this” and “where is the money going to come from” are frequently heard. Consider whether you make the same statements when considering capital investments. What’s the difference? Oh, that’s right, you can finance it. So instead of $6,000 at a time, it’s $200 a month and that makes it all right even though the return to the business may not be as great.

There is a critical difference in deciding what the right decision is and how you’re going to finance it. Try to make them separate decisions. First, what items are in the best interests of the company’s long term strategy? How much money will it take? Then and only then decide how to finance these items. Even an effective advertising campaign can be self funding with a good campaign running for 30-60 days prior to the vendor expecting payment. It is, by the way, possible to finance growth and not spend all of your excess funds on capital equipment.

An increase in operating expenses needs to be considered the same way your capital expenses are considered. What return do you expect from your investment? Sometimes there are firm calculations you can actually make. Other times you just have to decide to do it because your experience and insight tells you it’s the right thing to do. In either case you must consider all of your options before making that final decision.

Published in the American Drycleaner, November 2000


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