Spending Money Doesn’t Equal To Creating Value

Cost optimization. Budget cuts. Downsizing. Focus on the bottom line. There are so many things that you can do to get a healthy balance sheet. There are so many different ways how to cut costs and save money. There are also many ways how to spend money you’ve got. Some ways of spending money are better than others because they create value that can be harnessed in the future.

As everything in the universe, it is all about balance. Balance between being cost effectiveness and investing for the future. Just saving or spending money doesn’t create value. Value is created when money are saved and then spent the right way at the right time.

Spending versus investing

I always have to wonder when I hear about a company that is “investing” an exuberant amount of money on facilities and employee perks how much return on that investment there really is. If you call it investment then you surely want to get something in return. Otherwise, it is just pure wasted money. Curiously enough, you mostly hear this about companies who can least afford it – start-ups. Under the pretense of creating “a cool culture” these companies, often without proven business model, spend money they don’t even have. It raises a question of what sort of culture you are creating and what sort of leadership you are showing to your employees when you are spending money on things that matter very little or may not matter to the business at all.

So how do you measure the return on that investment? If you need a facility for presentation to potential customers you can calculate relatively well what the difference is and how having better facility translates directly to sales.

But what if you don’t use it to entertain customers? What if you use it as back office, shared services or development center? The return is then realized by your ability to attract and retain good employees and them producing good quality work. The thing is, working environment is important, but not the most important factor when it comes to employee engagement, retention, and hiring. There are way too many more important factors like vision of the company, meaningful and satisfactory work, team mates, compensation, company culture, management team, financial stability of the company, and somewhere at the bottom physical environment and perks.

It can act as a nice marketing ploy since the press and even your employees will share pictures and it will attract attention. However, once you satisfy the basics in a form of reasonably modern office space with the basic amenities in a decent location any additional dollar spent on it means you can’t spend it on one of the more important factors that would drive your business forward.

Consumers versus creators

I recently saw an episode of Columbo (a detective series) where one of the bad guys after buying a bottle of wine for five thousand dollars at an auction answers his assistant’s question “Do you really need that bottle of wine?” with a disarming “nobody really needs a bottle of wine for five thousand dollars. I just don’t want anyone else to have it.”

I think this illustrates beautifully the mindset that many of us have when making buying decisions. We don’t really buy things because we need them, really need them. We buy things because we want them, because we believe it will make us feel better or even happy. Sometimes they indeed make us feel better. At least temporarily. When it comes to money most of us are consumers.

Almost everyone is prone to succumb to the consumer mentality. For managers it is often easier just to say “yes” to any request for budget coming from employees (especially if it is small enough) than to be firm and stand by the principles. If it doesn’t generate value (the maximum value I can get on that dollar) then it shouldn’t be spend regardless how small it is.

Those who are creators will use the money they got not to buy a new Ferrari but to invest in creating value. They build a company, create jobs, and build products. They will use their money in a way that produces something that will eventually bring them closer to their goal or that will create something for other people to use.

“Managers needs to have a creator mind, focus on mission of the company, and don’t get distracted by the human desire to consume.”

So what does it all mean for you if you are in a management role? If a company acts as a consumer it will buy fancy cars, fancy equipment, have luxurious offices, and tons of perks for its employees. If a company’s management has the creator mentality they will rather invest in accelerated growth and getting the company to profitability.

Every dollar counts. It is often not about whether inviting employees for a free dinner every Friday, or buying a fancy couch to chill out area will cost that much money. It is about having a creator mindset and a tenacity to stick with the primary mission of the company and not getting distracted by trivial matters and the human need to keep spending money just for the sake of looking good or indulging ones desires.

 

What is your take on spending money in the business world? In fact, what is your take on spending money in general?