You can’t maximize the short-term profits and the long-term growth rate at the same time. The math … [+]
I recently met a business where the owner made 100% of her decisions based on how it impacts the immediate cash flow of the business. And I mean every decision! Whether it was hiring business professionals like accountants or lawyers that were advising the business. Or, making marketing decisions based on what drove revenues this minute. All the way down to minute things like figuring out which credit card to use, to drive immediate cash back rewards on expenses. Some of this is admirable. But most of this was completely short-sighted and hurting the business long term.
I get it. Most entrepreneurs are cash starved and looking to save every penny they can. But in this case study post, you are going to learn that cutting pennies today, could be costing you millions of dollars tomorrow. Allow me to explain.
Don’t Make Short-Term Decisions Which Hurt Long-Term Growth
One of the actions this entrepreneur made was only investing in marketing tactics that would drive an immediate sale and immediate return on marketing investment. The problem with that focus was that she was running a B2B business, where the highest ROI spend this minute, may not be the best tactic for maximizing long term sales, given the long sales cycle lead time of B2B. For example, if you focus on driving sales, profits and returns today, you would most likely select Google as your primary marketing channel. And that will most likely result in lower ticket transactions, where the client budget is already in place and can be spent today. If she was focused on the long term, perhaps she should have invested in big trade shows in her industry, where very large ticket orders could be secured, albeit on a slower and more patient timeline. So, yes, trying to drive an immediate return is nice. But not if you are sacrificing 10x that amount of sales and profits down the road. It would be more ideal, to better capitalize the business to better focus on the biggest long term ROI opportunities, even if it requires needing some short term working capital to bridge the gap.
Don’t Be Cheap on Strategic Issues, You Get What You Pay For
When I presented this client with around 10 accountants and 10 lawyers to consider to help her business, I gave her a complete picture of the strengths and weaknesses of each of these professionals, and gave recommendations on which ones I thought were the best to help her business and her specific needs. For example, I knew she was going to need advisors with a lot of M&A experience to help her accomplish her desired roll-up strategy. But the only metric she focused on was price. She ended up picking the cheapest lawyer and the cheapest accountant on this list, neither of which had the required M&A experience she was going to need, which came at a slightly higher hourly rate. That is like cutting off your nose to spite your face! You need advisors that know your business needs or industry. Engaging human talent should not be the same mindset as buying a commodity, like loaf of bread. With human talent, you really do get what you pay for, based on their expertise.
Don’t Pick the Cheapest Solution, Pick the Best Solution in Your Budget
Then I was helping this client with setting up various off-the-shelf technologies, service providers or other point solutions for her business. This included things like her advertising agency, her CRM software, her SEO firm, etc. And again, like with the lawyers and the accountants, it was more of the same. She would see five options for every need, would ignore the strengths or weaknesses of those solutions, and focus only on price. She didn’t care that there may be better options out there, to help propel her business to new heights. All she cared about was how the investment would impact today’s cash flow. Stop the madness! Price should be one of the major considerations when picking solutions, but not the only driver. It is much more important you find solutions that present the best value—offering the most advantages and least disadvantages at the most acceptable price (which is not necessarily the cheapest price).
Don’t Let Short-Term Decisions Hurt the Customer Experience
One of the short term decisions she made was in picking her shipping provider, moving goods from her warehouse to her customers. She considered around five solutions, and again picked the cheapest, trying to maximize gross margin. The problem was, she didn’t investigate other important data points, like the percentage of successful online deliveries of each vendor. It turned out, that the cheapest shipping vendor, was also the one with the highest instances of late deliveries to customers. And guess what happened next; customers started complaining about missing shipments, which put the company in a negative light, and they started to lose repeat sales. Again, vendor decisions should be much more than simply a price-based decision, to avoid customer facing situations like the above.
Don’t Be So Focused on “The Weeds”, That You Lose Focus on the Goal
This entrepreneur was so focused on short term cash flow, that is was like an obsession. It just entirely consumed her and drove all of her attention. She would pull out her monthly income statement, run through every expense item, line by line, and figure out how to drive down the cost of each item. She put hours and hours of work into that sole goal. Congrats, you saved a few bucks. But shame on you for not putting those same hours into figuring out how to propel your revenues to newer heights, which to me, should have been an even more important area of the business that required her attention. You may have saved $10K in monthly expenses, but you probably hurt your revenues by $100K per month had you focused your energies there. The point here: you need to prioritize your time and invest it in the best ways possible.
So, the moral of this story here: don’t be a cheap ass!! Yes, you want to keep your expenses as low as possible. But you don’t want to make cash flow driven decisions that end up slicing your own throat. Each business decision needs to do what is right for the business, overall for the long term. Not, simply what is best for the bottom line in the immediate term, for the reasons summarized above. Instead, make sure your business is properly capitalized to allow it to afford the “right” solution for the business, that will help give the business the highest odds of long term success. And, remember, it is impossible to maximize long term growth and short term profitability at the same time, you have to pick one or the other.
George Deeb is an entrepreneurial CEO, growth expert at Red Rocket Ventures, and author of “101 Startup Lessons—An Entrepreneur’s Handbook”.