Four small business money-saving myths
It’s hardly news that cash flow is a key issue for small business owners. According to a recent report from Ernst & Young, it is often cited as a top concern by Canadian mid-market businesses.
If you’re just starting out, you know that every cent matters – and have probably been inundated with enough advice about saving money that it’s difficult to know what to follow and what to ignore.
Chances are, in fact, that you already knew some of these chestnuts: For example, that you must spend money to make money, and that instead of saving, your first goal should be to purchase software or equipment that will help grow your business.
Below I’ve compiled a few common money savings “tips” often given to small business owners – and explain why you should do the exact opposite.
Myth 1: Spend first, save later
Saving money every month should be non-negotiable, no matter your circumstances. Opening a new business requires an initial investment, yes, but if your goal is to reach a certain profit margin before you start saving, the fact is that day will probably never come. The excuses you’ll have at the beginning to not save money – cash flow is tight; you’re running a promotion; your heating or air conditioning needs to be serviced – will still exist years later.
Consider saving a percentage of every invoice, even if it’s a small one – you can increase the amount once you’re used to putting away money every month. The sooner you start saving, the better prepared you’ll be for an emergency. And when that emergency arrives (and it will), you’ll save yourself the stress of accumulating debt or scrambling to secure financing, which can be especially difficult for small businesses.
As a business owner, saving should be the first thing you do when you’re paid. Think of it as investing in yourself and your business. Once you’ve paid yourself, pay everything else with what’s left. You might need to revise your budget at first to make it work, but regularly reviewing your finances is always a good thing anyway.
Myth 2: Buying new equipment is equivalent to saving
Yes, you might have your eye on a big purchase, but that doesn’t make it less important to save money. It’s as important to plan for the unknown and unexpected as it is to save up for new equipment or software that can help grow your business.
What would you do, for example, if a fire destroyed your office and you had to pay a massive insurance premium? If you reached the end of the month and were still waiting for that corporation or government department to pay for services you delivered three months ago?
Yes, it’s important to invest in your business, and often that means saving up for big-ticket items like an ecommerce license or new delivery vehicle. But the key word remains “saving”. Whether it’s equipment or your finances, you should set goals for both and take small steps towards them.
Myth 3: Keep your savings in a savings account
Putting your money into a savings account is convenient because you can see and use it whenever you need it. But being able to quickly and easily access your money also increases the temptation to make impulsive financial decisions (do you really need that new laptop just because it’s on sale?)
Another disadvantage of saving money in the bank is that you earn very little interest. Making the effort to invest it elsewhere, whether in a tax-free savings account, RRSP, mutual funds, or online investment platform, often produces much greater returns, especially when it comes to long-term savings.
Money – whether making it, saving it, or sourcing it – arguably represents the biggest challenge in running a small business, and the odds are against you: according to Statistics Canada, fewer than 50 percent of small businesses survive for 10 years. If you still want to be around not just tomorrow but in five, 10, or even 20 years, your best bet is to start making your money work for you.
Myth 4: Putting cash away is the only way to save money
As acknowledged above, investing in your business is important, and saving up for big equipment or software purchases is a better idea than buying them now and paying the credit you owe on them later. But it’s not the only way – cutting operational costs can also help. Here are a few ideas:
- Share space with another entrepreneur: for example, by running two restaurants in a single space, or by sharing an office if your business requires an office environment. Better yet, adopt a virtual business model, conducting meetings over Skype or Zoom, renting WeWork spaces for in-person meetings, and otherwise saving on rent and operational costs.
- Go green: cutting down on paper use, switching to energy-saving light bulbs and appliances, foregoing a Keurig coffee maker, and buying refurbished furniture isn’t just great for the environment – it helps your bottom line too.
- Run your business in the cloud: If you have an internet connection, you can access just about every type of business management software you could possibly need online, from email to accounting solutions, which means you don’t need to invest in expensive hardware or the skills to maintain it.
- Manage your inventory wisely: Research sales projections before making any purchases, so that your money isn’t tied up in surplus stock.
- Pay invoices on time to avoid interest and late payment fees, and take advantage of early payment discounts whenever possible.
- Outsource ad hoc work, like design and copywriting, to freelancers rather than hiring a full-time employee.
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