Small Business Capital

How to Spend Your Business Capital Wisely ...

As soon as you start a business, you need to start spending, so you purchase items. This then is the core of the problem.

Simply stop buying and you won't spend any capital. But, as we all know, this is impossible, in business you have to spend money on staff, inventory, advertising and a multitude of other things.

So, what should be done?

Well, manage your small business capital is the answer. Realize that all business expenditure can be divided into three spending categories and then manage those categories.

Your start-up capital, set aside at start-up has to last for many months or even years, depending on your business type and when your business begins to turn a profit. So spend as little as possible and only spend if the end result is what you require.

Everything you buy must be bought based on whether it is ...

• Revenue or income generating.
• Non-revenue or non-income generating
• An impression or necessity need.

Straight away you will have spotted the obvious, spend on item one, don?t spend on item two, and only spend on three if it is essential.

Managing your small business capital based on these criteria will conserve capital for essential purchases only.

Now let's take a look at these three spending categories in a bit more depth ...

1. Revenue and Income Generating Purchases ...

In general such items will enable greater revenue to be generated. These can vary from machinery assets to spending money on advertising.

You will find that items that are needed to run your business more profitably tend to be capital purchases. Managing your small business capital by spending on such items will lead to growth in sales and profits.

Be careful here however, you can always find essential items to buy, essential in your mind that is, but that are in fact very seldom used. Don?t buy anything that is bought specifically for one small job and then sits unused. Either turn down the job or go out and find extra work to keep the item busy.

Always ask yourself before buying "Will buying this increase my revenues/profits?" If you answer no, then it is pretty safe to say that you don?t need it.

2. Non-Revenue or Income Generating Purchases ...

All businesses need some non-revenue purchases, but you need to keep them as low as possible.

Here is where you spend money on your office furniture, locker room furniture and the many other utility items that a business might need.

Most of these items need not be new and often are not needed at all, so think carefully before buying.

3. Impression or Necessity Items ...

Certain items in a business are not strictly revenue or non-revenue generating, but are often needed to improve the business impression.

Here you will need to use your common sense. If for example you need a showroom, you will need to create a good impression by having it well appointed and so you will have to spend money here.

If your office looks a mess and you meet customers there, you are not going to get too many good quality orders.

Managing your small business capital expenditure does not mean never spending. The right impression can be critical to customers and future orders, so you have to spend on purchases to create the right impression where necessary.

Good office equipment, such as computers, printers, scanners, telephone answering machines, etc. are needed, but don't make money directly. Office stationary, forms, etc. are all essential and cannot be done without.

However good quality, and creating the right impression does not mean gold plated.

Capital Investment ... New versus Used

The time for new is when your business is making good profits and you can afford the best.

Until then, small business capital management will mean that you buy used, in most cases. Just remember two things ...

• Furniture can be bought used and in good working order.
  • In many cases you can acquire office furniture and other items free, simply by collecting them.
  • Check out the newspaper classifieds or local bulletin boards.
• Used machinery and equipment is another story.
  • If you are going to buy these items used, you will need to be aware of the risk. Used machinery, if bought from someone you know or from a dealer who provides a warranty, can be a lot cheaper than new and will do the job perfectly well.
  • But, be careful to buy the best new machinery, as a bad used buy resulting in a new buy is a lot more expensive than just the new buy alone.

Depending on your type of business, a combination of used and new is probably best. As well as being kinder on the start-up capital that you have available.