Most small business owners have probably heard the phrase “You have got to spend money to make money” while owning and operating a business. However, for some small business owners the decision to spend money on equipment, inventory, supplies or other expenses can be a complicated, difficult decision. This is especially true for new or starting small businesses. Is the purchase for a need or a want? Will I have enough cash flow to support the purchase or the debt repayment? Will the investment provide the return that I need? Are economic uncertainties making planning challenging? These are all important questions to answer when making a financial decision that could make or break your small business. Let’s delve into some of the important factors when making the decision to spend money.

Want vs Need

Needs are essential for your business to function daily – like raw material, inventory, or supplies. These should take priority in your budget. Without them, your business cannot generate income.

Wants on the other hand, are not critical to current revenue but may enhance efficiency or open new income streams. Plan for wants when cash flow is healthy, but be prepared to adjust due to unexpected expenses, seasonality, or market shifts.

Cash Flow

Understanding your cash flow-and how it impacts your ability to spend-is crucial to your business’s long-term success. While you might not need complex financial modes, tracking income and expenses consistently is key. Ideally, having 3-6 months of expenses in reserve offers flexibility, but many businesses must operate more leanly. Using excess cash wisely and managing the bottom line helps balance needs and wants.

• When Cash Flow is Negative – If cash flow is negative it may seem like there is no light at the end of the tunnel and turning the corner seems impossible. In these situations most small business owners will turn to short term financing options. If cash flow is tight adding debt or further reducing revenue may only compound the problem. If this happens, don’t panic.
  • Prioritize spending only on what’s essential to maintain operations.
  • Increase revenues if possible in ways that do not require any additional cash outflows.
  • Avoid adding debt unless absolutely necessary – consider using savings or reserves first. It may be easier to re-pay yourself when able rather than stretching to make a debt payment monthly.
  • If financing is needed, review all options carefully. Make sure that all terms and conditions are clear and repayment amounts are defined. There are several online financing options for small businesses that do not require collateral and can fund quickly.
  • Create a 30/60/90-day plan to stabilize cash flow. Be vigilant and adjust as needed.
• Spending for Unexpected Situations – When things break or supplies run low unexpectedly and immediate attention and correction is needed:
  • Cash is ideal, but a credit card or line of credit is a solid fallback – if manageable.
  • Ensure debt repayment plans fit your budget.
  • Use these situations as reminders to build a reserve when possible.
  • While these situations are not ideal, they are easy to navigate.
• Spending During Economic Uncertainty – In times of reduced revenue:
  • Scale back expenses based on decreased demand.
  • Plan ahead for seasonal downturns by saving or prepaying expenses.
  • Avoid taking on debt unless absolutely necessary – preserve cash and maintain flexibility.

Planning for Large Expenditures or Rainy Days

When your business has excess cash flow and is doing well financially, it is likely that we will want to spend on everything we need and most things we want. However, this is not always the best way to operate. Spending without thinking about long term or big picture plans can put us in risky situations. Careful planning and preparedness is when the greatest opportunities for your business to spend money to make money exist.

• Build a cash reserve – This is one of the most important steps that should be taken when your business has excess cash flow. Starting with a small goal will get you in the habit of saving and will be easier to build over time. Starting with a large, lofty goal that may seem impossible to achieve and be discouraging.
• Set aside funds for large purchases such as new equipment, machinery, growth opportunities or investments into new revenue streams.
• Use separate savings or money market accounts to avoid tapping into operational funds.
• Platforms with “savings envelopes” can help organize funds by goal.

Taking on Debt

The decision to take on debt for your business is not an easy to decision to make. If borrowing is necessary to cover operating cash flow shortfalls, making purchases or completing repairs and maintenance:

• Be sure the business will be able to meet the monthly payment obligations without straining cash flow.
• Because of cash flow, lack of collateral or lack of liquid funds funding options for small businesses can be limited, research different lending options – select the one that best fits your needs and budget.
• Avoid over-borrowing to prevent a debt cycle, where more debt is needed just to stay afloat. A debt cycle can be hard to break
• Smart borrowing can support growth; poor borrowing traps your business

Final Thought

Running a small business is both challenging and rewarding. Strategic spending – especially knowing when and how to invest in your operations – can make the difference between short-term survival and long-term success.