Cash is always tight in a startup, so you have to watch every penny that goes out the door. But there comes a point when frugal turns into cheap, and you end up doing more harm than good. By skimping on certain expenses you could seriously hinder your business’s ability to perform or to expand.
Entrepreneurs are notorious for trying to do everything themselves. Taxes are a great example of being too cheap. Rather than paying a bookkeeper $50 a month, founders often try to do their taxes themselves. Not only does it take them forever to learn Quickbooks and add the necessary entries, but they’re usually wrong.
There are two things you should do to be frugal and not cheap. First, make a monthly or quarterly budget of projected expenses. By doing this in advance, as part of a larger strategy session, you take the out of the decisions, and do what’s best for the business. Second, especially when it comes to larger capital investments, do a back of the envelope payback period calculation. Figure out how long it will take to “earn back” your initial investment. This payback period should give you an idea as to whether the proposed expense will be worthwhile.
Be careful not to be too cheap. Otherwise, as Henry Ford said, “If you need a machine then don’t buy it, you’ll eventually find you paid for but don’t own it.”
