Spend Smart

One of the hardest things any business owner has to decide is when and how to invest in the business.  Regardless of whether the decision is large or small — from hiring additional staff to buying a building, you make it on the leap of faith that it will pay off.  You assume that tomorrow will be bigger than today, or at least the same size.  As entreprenneurs of the first order, creative business owners are skewed to believe in the possibility of a larger future — otherwise you probably would not have started your creative business in the first place.  However, as a business owner, the decision to (re) invest has to be more reasoned and planned than simply a leap of faith.

I have suffered terribly from building a huge kitchen on the thought that “if we build it, they will come”.  It was the biggest business mistake I have ever made (and I have made some serious lulus).  We over-built, over-spent and over-staffed and went broke in the process.  If you have a successful business, the best solution is to let cash flow fuel growth.  Build what the business can support on its own.  Borrowing beyond the capacity of the business or taking on investment is a tough way to go for either a concept unproven at the scale you want to take it to or an unproven concept altogether.  That being said, you invest every day in your creative business and you do need to grow.  My advice is to do what is necessary to grow the core business and diversify current cash flow first, expand for the longer term second.

In the best case, you can use your investment to grow and diversify current cash flow to fuel longer term growth.  For instance, if you are a stationer who wants to start a private DIY collection which will require a significant investment in techology and software, why not build a demo site and try to pre-sell the idea.  First, you will see what the market is and if it has potential.  Second, you will generate revenue that will contribute to your investment in the project.  And, third, these early adopters will hopefully be the fans you need to make the idea a success.

I am reminded of Craigslist, which generates $100 million with 30 employees — one terrific business.  Whatever new area it may choose to go into will certainly be fueled by internal cash flow without worry about what investors or lenders might think or do.    However, in 2004, rather than buy back the shares of an executive who wanted to sell, it let those shares be sold to Ebay.  In 2007, Ebay set up its own classified advertising business, Kijiji.com.  The two are now embroiled in a very nasty lawsuit.  Lesson learned.  Other people’s money always comes with a price.  If your creative business can fund the investment on its own, it should.