If you think running a frugal business is quaint and old fashioned, think again. Running a frugal business doesn’t mean scrimping and doing without. Instead, it’s an efficient way to run your business.
A frugal business keeps operating costs low, which can have a significant impact on the bottom line.
A frugal business is a STABLE business. It’s one that isn’t teetering on the brink of bankruptcy each month, relying upon prompt payment of AR in order to stay afloat. A frugal business is one built to withstand the test of time and competition.
One of the smartest things a frugal business owner can do is to differentiate between the two types of business spending. investments or expenses.
Investments vs Expenses
If you’re going to run a frugal business, you must recognize there are two types of business expenditures: investments and expenses.
An INVESTMENT is money you spend with a reasonable expectation of a return. In this case, the return is a positive impact on the bottom line. An example of business spending that is an INVESTMENT is advertising.
The frugal business owner invests in advertising and marketing their business. Because it’s an INVESTMENT, the frugal business owner measures the results of their campaigns. If a particular campaign isn’t providing a RETURN ON INVESTMENT, then the frugal business owner stops spending money there.
An EXPENSE is money you spend within your business that you don’t expect to add to your bottom line. Buying office supplies is an example of an EXPENSE.
Where to start
If you’re here looking for advice on how to start your frugal business, congratulations! Years from now, when people tell you how “lucky” you are to have beaten the odds and started a successful business, you’ll be tempted to tell them that luck had nothing to do with it.
If you’re here looking for advice on how to reign in costs and get your business spending under control, congratulations to you as well. Many business owners decide to close their doors rather than address the problem of run away spending within their business.
My name is Kathy Hendershot-Hurd and I’ve been running a frugal business since 1997. My business has survived more than two decades because it’s a frugally run.
Frugal Business Thinking
When it comes to running a frugal business, you have to make sure you’re maintaining balance. It’s possible to take frugality to the extreme. That’s why I encourage you to view expenses as either INVESTMENTS or EXPENSES.
Let me give you an example of going to the extreme with your frugal business thinking. I made the switch from developing static HTML based websites to developing websites using WordPress in 2005. At the time, one of my former clients said to me, “Wait? People are paying you to set up blogs for them? I thought blogs were free.”
That’s an example of frugal thinking gone to the extreme. My former client couldn’t get beyond the “I can do this for free” to see why it was an INVESTMENT to rebuild her website using WordPress.
It was sound frugal business thinking for me to change how I created websites for my clients. Creating static HTML is a time intensive process. Back in the early 2000’s, building an HTML website is like “tattooing” the website’s design into each page. When a client wanted to add a page to their website, it meant changing each page on the website to update the navigation bars to include the new page. To update the design of web site, we had to create each page over again from scratch.
Using WordPress meant that clients could quickly, easily and most importantly ECONOMICALLY update their content and site design. I used the word picture of changing your clothes instead of changing your tattoo. In WordPress, the new design could be “slipped” on over the existing content. Instead of investing thousands of dollars and months in a website redesign, clients could change the look of their site for a fraction of the cost.
Frugality = Balance
That’s what running your Frugal Business is all about. BALANCE. Frugal businesses make smart investments that pay off in the long run.
A former client recently confessed that her business is struggling. She said the biggest reason she’s struggling is she insists upon doing everything herself.
She’s lost sight of balance. She’s lost sight of distinguishing between expenses and investments. She’s tried to cut costs as a way to get back to profitability.
I did a bit of research and saw the dark side of Frugality Gone Too Far. For starters, he website isn’t mobile friendly. She isn’t running a coffee shop, her website IS her storefront. That means her website is an INVESTMENT instead of an EXPENSE.
Instead of INVESTING in updating it, she’s “made do.” As a result, she’s seen a huge downturn in organic traffic.
How do I know? I’m a professional web developer. I have a wide array of tools I use to analyze website performance. One of these tools tells me that her website is getting killed in mobile search. This is because Google will show mobile responsive sites over hers on mobile devices. Another of my tools tells me my former client is spending money on PPC advertising to try to combat this trend. My tool shows me the performance of her chosen keywords.
My former client is a brilliant woman but she’s not a digital marketing expert. Her choice of keywords clearly illustrates this point. She’s focusing on using low converting keywords because – wait for it – they’re CHEAP!
Cheap vs Cost Effective
No where is FRUGAL thinking more necessary than in the wild, woolly world of PPC advertising. PPC stands for Pay Per Click advertising and it’s how much you’ll pay when someone clicks on your ad.
It’s tempting when you start out using PPC advertising to pick the CHEAPEST keywords offered. This is a FRUGAL MISTAKE because you’re choosing CHEAP over COST EFFECTIVE. PPC keyword costs are determined auction style. Businesses “bid” on what they’re willing to spend per click per keyword. Low priced keywords are usually low priced because they haven’t converted visitors into customers for your competitors.
DIY vs DFY (Done For You)
It’s fun to dip your toe into something new. It’s part of the fun of running your own business. Some business owners dip their toe into SEM, graphic design, social media marketing or branding and discover they have a real gift for it. Things click easily for them. However, this is the exception not the rule. I’ve worked with many small business owners who made stew when they tried dipping their toe into unfamiliar waters.
Your frugal business has to spend money. You truly must spend money to make money.
There are many times when you’re going to have to make the decision between DIY and DFY. When it comes to making this decision, you should first evaluate whether this is an INVESTMENT or an EXPENSE. DYI is often the best choice when it comes to EXPENSES while DFY is often the best choice for INVESTMENTS.
For example, you must determine whether your company website is an EXPENSE or an INVESTMENT. Unfortunately, this must be determined on a case by case basis. For some businesses, like a coffee shop, a website may not provide bottom line improvements. In that case, your website is an EXPENSE. However, if your website is your store front, then you are expecting your website to pay dividends – just like an INVESTMENT.
Dr. Jean Murray tells business owners she works with that they as they begin their business, they will make 10,000 decisions. Many of those decisions are about how to spend limited capital. Knowing the difference between and expense and an investment is the first step towards running your Frugal Business.