𝐁𝐚𝐥𝐚𝐧𝐜𝐢𝐧𝐠 𝐂𝐨𝐬𝐭𝐬 𝐯𝐬. 𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭𝐬 𝐟𝐨𝐫 𝐒𝐮𝐜𝐜𝐞𝐬𝐬

Cash flow is crucial, yet spending is not all the same. Some expenses are necessary to operate, while some are critical to your direction and value.
 
How should you distinguish costs to run a business vs. investments to grow?

𝗖𝗼𝘀𝘁𝘀 𝗮𝗻𝗱 𝗜𝗻𝘃𝗲𝘀𝘁𝗺𝗲𝗻𝘁𝘀

Expenses such as salaries, rent, utilities, and raw materials are unavoidable.
 
These costs are essential for the day-to-day operations of the business. However, often costs are not tied to performance or outcomes.
 
If costs rise without a corresponding short-term revenue increase or a determinable value increase, the business has problems.

Spending on research, development, marketing, new equipment, or expanding into new markets are investments for longer-term benefits.
 
These investments aim to grow the business and enhance its value.

 
𝗖𝗼𝗺𝗽𝗮𝗿𝗲 𝗮𝗻𝗱 𝗖𝗼𝗻𝘁𝗿𝗮𝘀𝘁

The distinction between costs and investments is not always clear and depends on the context and the expected outcome.
 
An example is employee training. It could be seen as a business cost or as an investment if meant for greater productivity, efficiency, and/or revenues.

In this case, thinking about the ROI of training could improve its purpose.

Decisions on costs and investments should be aligned with your financial health, market opportunity, and the competitive landscape.

Some expenses may bring long-term gains, but the short-term losses? Can your runway afford the losses, and will the investment be worthwhile?

When faced with reducing expenses, you may be tempted to cut everything. However, if you can lower costs without hitting zero, you can maintain momentum and ramp up more easily when ready.

 
𝗛𝗮𝘃𝗲 𝘁𝗵𝗲 𝗘𝗻𝗱 𝗶𝗻 𝗠𝗶𝗻𝗱 

At seven, my younger daughter won an award, “Begin with the End in Mind.” (At 14, she has the next ten years planned, so that award is spot on.)

Cutting costs may improve your business depending on your current runway and planned exit. However, don't forgo all investments.
 
In some cases, investing in growth may help you gain a competitive advantage, expand into new markets, and/or increase your valuation.

For instance, when the cost of customer acquisition results in a favorable lifetime value, you may take capital to capture more customers.

If you desire capital, consider the tradeoffs involved and the expected return on investment regarding value, risk, ownership, and velocity.

Every financial decision has tradeoffs. Some founders look at all expenses as barriers to success. Successful founders recognize and address the tradeoffs. 

 “𝑻𝒐 𝒈𝒓𝒐𝒘, 𝒄𝒂𝒓𝒆𝒇𝒖𝒍𝒍𝒚 𝒎𝒂𝒏𝒂𝒈𝒆 𝒄𝒐𝒔𝒕𝒔 𝒂𝒏𝒅 𝒘𝒊𝒔𝒆𝒍𝒚 𝒄𝒉𝒐𝒐𝒔𝒆 𝒊𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕𝒔.”

Effectively holding down costs while strategically investing where needed leads to the short-term runway and long-term success.

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Photo by Loic Leray who can be found here: https://portfolio.loicleray.com/

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This post was written by me with AI editing.