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Why Sticking to a Tight Budget Can Be Beneficial

May 05, 2015

Pinching pennies - even when your business is flush - pays off in a variety of surprising ways. Here's why it makes sense to stay frugal.

Pinching pennies - even when your business is flush - pays off in a variety of surprising ways. Here's why it makes sense to stay frugal.

When starting up a business, most of us are forced to work with a tiny budget. But even as your business grows, there are benefits to acting as if you’re still operating on a shoestring.

Obviously, the lower your outgoing expenses are, the more profit stays in your pocket. That’s reason enough to watch expenses and adhere to a budget.

But beyond bigger profits, there is another overriding reason to stick to a tight budget, even if you have extra money in the bank: You’ll have a stronger, healthier business.

Here are three ways a tight budget helps:

It Encourages Creativity and Innovation

One of the best things that came out of my own bootstrapping situation (I started a business with my own savings and grew it only as the business brought in money), is that it forced us to be innovative in dozens of small ways. All those innovations added up and saved us many thousands each month and speeded up our growth trajectory. We are still benefiting from those innovations today.

We didn’t have money, so we were forced to be creative. That creativity came in two ways:

  • We had to find better solutions to operational problems. First, we were forced to rely on automation, some of which we custom created to drive out many hours in daily activities. In other cases, we selected off-the-shelf software to automate, and that enabled us to grow, but at the same staffing levels. We also outsourced many of our IT operations to third parties. We avoided expensive investments in IT hardware, and got IT services at a lower overall cost and with more efficiency than we could replicate internally.
  • It forced us to tweak our business model to be as efficient as possible. There are always multiple ways to sell products and services and deliver them to customers. But one way may be less labor intensive and scale for growth faster than another way. For example: instead of always selling custom services as a consultant, requiring a custom quote to be prepared each time, perhaps there are ways to sell “packages” of commonly requested services for a set price. That way you don’t have to spend the time and effort on custom quotes for every client. This shortens the sales cycle and cuts down the hours spent preparing quotes.

The benefits of being creative in our case were dramatic, because we were able to grow without going into debt. And we integrated efficiencies early on, into the very fabric of our business. Necessity really is the “mother of invention.”

Be Better Prepared for Downturns

The economy is cyclical. In fact, there’s a term for it: the business cycle. The economy goes up, then it goes down. Downturns are inevitable, sooner or later.

The killer in many businesses when a downturn occurs is fixed expenses. When sales are slow, some companies find it hard to cut back enough to get through the down cycle. Why? Because their fixed expenses, such as rent and salaries, are high, and they can’t adjust fast enough or cut deep enough.

With downturns, you may have to adopt an attitude of “weathering” it. Sometimes the best goal is to try to survive it relatively unscathed, until customers start ratcheting up their spending again, and your sales increase. If you get used to operating a business leanly, you will have more cushion ready for those inevitable recessions.

It Forces You to Solve Underlying Issues

Sometimes it can be easier to spend on a quick fix than solve a chronic issue in your business. For example, if you have customer service issues, you may be tempted to add people to handle customers. That may be the right solution—you may actually be short-handed for your volume.

On the other hand, it may not be the right answer -- especially today, when you can drive so many efficiencies through automation. Your real problem may be inefficient or inadequate systems.

Throwing more people into the mix may obfuscate the real issues and even make things worse. Now you have more people to train and manage. You have more people to make hand-offs among and more opportunities for things to fall through the cracks.

What you may need instead is an overhaul of your customer ticketing system or a self-serve appointment system. Or perhaps you have a product design problem that needs to be solved, to minimize customer satisfaction issues in the first place.

Doing a careful diagnosis before adding staff helps make sure you are addressing the underlying problem and not just throwing money at the symptoms of the problem. And it can help you avoid having to make painful decisions about such things as layoffs later on.

Remember: Keep a lid on the expense budget, even as your business becomes more successful. You’ll have a stronger and healthier business as a result.

This article was originally published on Inc.

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