Stop! Before you buy that must-have gadget or supply for your office I challenge you to pause and decide whether it is an expense or an investment. It makes no difference whether you are about to purchase a new mini-iPad, hire a company to upgrade your website, or renew your newspaper subscription. The size or cost of the purchase is immaterial; the tangibility of the acquisition is irrelevant. What matters is that you are about to spend money and you have no idea whether it is an expense or an investment.
What is the difference between an expense and an investment? At a very basic level the answer is:
- Investment = good
- Expense = bad
Do I have your attention now? Good. Let’s go into more detail.
An expense results any time you spend money on something that has little or no demonstrated value. Now, I will share with you that this is not the definition you will get if you ask your accountant or bookkeeper. However, as a small business owner, this is the definition that should concern you. Whenever you spend some of your precious cash on something that provides little or no value to the growth of your company it is an expense.
Contrast this to an investment which is any cash outflow that provides a demonstrated return. Again, this definition is going to vary some from the one that your finance advisor will use. As a small business owner, demonstrated return relates to the long-term growth and stability of your company. And, it directly relates to your chosen growth strategy.
At this point, you may be saying that my definitions are as clear as mud, so I will provide some examples to add clarity.
Example 1: In today’s connected world it is essential for small businesses to be connected to the internet. No business will survive without access to email and online services. Whether your internet provider service is classified as an expense or an investment will depend on both the level of service that you purchase and the type of business that you own.
For a graphic designer, maintaining the fastest and most reliable connectivity is an investment in their business. The demonstrated return is the time saved accessing on-line images and sending projects to clients. To maintain a lesser level of connectivity would be a drain on their time and patience; therefore a budget internet package would actually be an expense even though it costs less money.
However, for a provider of therapeutic massage, very little time is spent on-line. Emails rarely contain graphics or large files and are usually small in size. For this business, the budget level of internet connectivity is an investment as it provides connectivity and access to websites that are valuable to the business. However, upgrading to the fastest access possible creates an unnecessary expense for the company as there is no long-term strategic goal and no value for the additional cash outflow each month.
Example 2: At one time, my cellphone was a regular, old-fashioned phone that I used to place and receive phone calls. For years, my phone was a great investment. It enabled me to stay in touch when I was traveling and provided me with a sense of security that help was only a phone call away if something should go wrong. I was also able to be more productive because it allowed me to make telephone calls when traveling, especially when using a form of mass transit.
However, over time, I started to view my cellphone bill as an expense. It no longer provided a level of return that was acceptable. Therefore, I invested in a smartphone. The smart phone is an investment for me because it enabled me to:
- Access email and my HighRise database when I am out of the office
- Update and follow up on social media connections when I have a spare moment
- Quickly scout out a new route if a road is closed due to construction or an accident
- Use on-line apps that save me time and money
- Maintain the level of connectivity clients expect
In short, the services available on smartphones and changes in technological expectations made owning a smartphone a good investment for me.
I challenge you to look at every bill you pay and every purchase your make in the next week and determine if it is an expense or an investment. If it is an expense see if you can:
- Turn it into an investment or
- Make it go away.
Don’t continue to spend your precious cash on expenses. Since expenses provide little or no value they are a drain on your business. Investments, on the other hand, provide the value and return that will grow your business.