What is the difference between an expense and an investment?
Well that’s an easy one I hear you say!
An investment will give a return whereas an expense is a cost or overhead.
Business owners commonly view money invested as discretionary and positive whereas money spent on expenses or costs as unavoidable and somehow negative. Expenses are classed as overheads which must be controlled or avoided. This view has been perpetuated by accountants over the years.
Now I don’t want to get too serious and boring about this but this difference in approach needs to be questioned by every owner who truly wants to grow their business.
Wouldn’t it be so much easier to view everything as an investment and apply the same criteria?
As with all investments if the investor doesn’t know the numbers they will be fearful of making an investment.
As a first step start to look at returns as single layer by which I mean the return is in the same resource, we invest money to get a return of more money, we invest time to get a return of more time. I will look at multi-layer returns, where say we invest money to get a return of more time, in a future article.
Interestingly, owners seem happy to invest money in a physical asset, say, a property as the rental return in money terms is easy to forecast.
However, that same owner may not be so happy taking on an employee, a human asset. Wages and salaries are classified as an expense or overhead. When deciding on employing a new person the focus is on the annual monetary cost of employing that person and the impact on the overheads rather than considering the return that the investment will produce. The return will be harder to forecast but maybe will be a multiply eg 2, 3 or 4 times the annual monetary investment.
In business, as sensible people, we would want to get the best return when investing our finite resources eg money, time, energy etc rather than spending (consuming) them. Yes, if it doesn’t give a return it becomes an expense and should be cut as why continue to waste a finite resource.
So as a start review all the resources in your business and ensure you know what you get in return for the investment.
Understand the numbers.