I recently met a business owner who made 100 percent of her decisions based on how it impacts the immediate cash flow of the business. And I mean every decision — from which accountant or lawyer to advise the business, what marketing could drive revenue this minute, all the way down to minute things like figuring out which credit card would yield immediate cash back rewards on expenses.
Some of this is admirable but mostly it is completely short-sighted and hurting her business long term.
I get it. Most entrepreneurs are cash starved and looking to save every penny they can. But, in this case study post, you are going to learn that cutting pennies today, could be costing you millions of dollars tomorrow. Allow me to explain.
Don’t make short term decisions that hurt long term growth.
This entrepreneur only invested in marketing to drive an immediate sale and immediate return on marketing investment. The problem is she is running a B2B business where the highest ROI spend this minute may not be the best tactic for maximizing long term sales, given the long sales cycle lead time of B2B.
For example, if you focus on driving sales, profits and returns today, you would most likely select Google as your primary marketing channel. And that will most likely result in lower ticket transactions, where the client budget is already in place and can be spent today. If she was focused on the long term, perhaps she should have invested in big trade shows in her industry, where very large ticket orders could be secured, albeit on a slower and more patient timeline.
Trying to drive an immediate return is nice, but not if you are sacrificing 10x that amount of sales and profits down the road. It would be better to focus on the biggest long term ROI opportunities, even if it requires some short-term working capital to bridge the gap.
Don’t be cheap on strategic issues — you get what you pay for.
I presented this client with at least 10 accountants and 10 lawyers to consider to help her business. I gave her a complete picture of the strengths and weaknesses of each and recommended which ones I thought best to help with her desired roll up strategy. She focused only on price and picked the cheapest lawyer and accountant on this list. Neither had the M&A experience she was going to need, which came at a slightly higher hourly rate.
That is like cutting off your nose to spite your face! You need advisors who know your business needs or industry. With human talent, you really do get what you pay for, based on their expertise.
Don’t pick the cheapest solution, pick the best solution.
Then I was helping this client with setting up various off-the-shelf technologies, service providers or other point solutions for her business. This included things like her advertising agency, her CRM software, her SEO firm, etc. Again, like with the lawyers and the accountants, she ignored the strengths or weaknesses of those solutions and focused only on price. All she cared about was how the investment would impact today’s cash flow.
Stop the madness! Price is a major consideration but not the only driver. It is much more important you find solutions that offer the most advantages and fewest disadvantages at an acceptable price — which is not necessarily the cheapest price.
Don’t allow short-term decisions to ruin your customer experience.
One of the short-term decisions she made was in picking her shipping provider to move goods from her warehouse to her customers. She considered at least five solutions, and again picked the cheapest to maximize gross margin. The problem was, she didn’t investigate other important data points, like the percentage of successful online deliveries of each vendor.
It turned out the cheapest shipping vendor also had the highest instances of late deliveries to customers. Guess what happened next? Customers started complaining about missing shipments and they started to lose repeat sales. Again, vendor decisions should be much more than simply a price-based decision, to avoid customer facing situations like the above.
Related: 10 Ways to Trim Shipping Costs
Don’t get lost in the weeds and lose focus on your goal.
This entrepreneur’s obsessive focus on short-term cash flow consumed all of her attention. She would pull out her monthly income statement, run through every expense item, line by line, and figure out how to drive down the cost of each item. She put hours and hours of work into that sole goal. Congrats, you saved a few bucks, but shame on you for not putting those same hours into figuring out how to propel your revenues to new heights. To me, that is more important and required her attention.
You may have save $10K in monthly expenses, but you probably hurt your revenues by $100K per month had you focused your energies there. The point here: you need to prioritize your time and invest it in the best ways possible.
So, the moral of this story here: don’t be cheap! Yes, you want to keep your expenses low, but you don’t want to make cash flow driven decisions that end up slicing your own throat. Each business decision needs to do what is right for the business for the long term, not simply what is best for the bottom line in the immediate term. Make sure your business is properly capitalized to allow it to afford the “right” solution that will give the business the best odds of long-term success.
Remember, it is impossible to maximize long term growth and short term profitability at the same time. You have to pick one or the other.