How owners approach Capital Expenditures says a lot about their commitment to success.
By Anthony Noel
At every stage of a business' life, decisions about where, why and how best to spend money must be made.
Some of these decisions are easier than others, but they all become easier with the passing of time and the gaining of purchasing experience.
It's pretty simple, for example, to determine (or negotiate) the best price among local vendors on a given quantity of 4/4 FAS red oak. It's equally simple to trace the need for and impact of such a purchase: (1) You have an oak job in the shop. (2) If you pay more than you need to for the raw materials, you don't make as much money on the job as you could have. Purchasing materials is one thing. Capital Expenditures -buying a machine, or a truck, or a spray booth, or entering into a lease, or buying a building — well, that's something else entirely. And it is here that the possibility of making Fatal Mistakes becomes very real.
The Fatal Mistakes series has thus far covered two of the five crucial operational areas to which attention must continually be paid if a business is to succeed: Communication and Costs. We'll address Capital Expenditures this month and next, then turn to Marketing and Overall Management Approach as the series winds down.
The prospect of making large purchases strikes Fear in the hearts of many a fledgling business owner. Or at least it should.
Actually, Fear is too strong a word.
Any time you're Fearful of making a decision, remember two rules: Rule Number 1, don't decide. Rule Number 2, if you're determined to decide anyway, refer to Rule 1.
If you ignore these rules and permit yourself to get cornered into making Fear-based decisions, expect to get the short end of the stick. Because you will — every time.
How do you avoid getting into that corner, into the position of making decisions based on Fear? By not basing business decisions upon Desire.
Desire is what you feel about acquiring something you want, with zero regard for whether you actually need it.
Desire is the first edge of the two-edged Capital Expenditures sword. It takes only a few (sometimes just one) Desire-based decisions about big-ticket purchases before you might find yourself in a corner called, "Having an auction."
While decisions about big purchases do strike — if not Fear, what, then? Let's call it Prudence - into the hearts of many owners and managers, these decisions sadly have no such effect on many others.
These folks will spend money (or credit, at least) on pretty much anything, particularly if it gets them closer to their (idealistic) "vision" of what their business should look like. Not what it should actually be capable of from a production and profitability standpoint, just what it should look like.
It would be going a little overboard to say that pride has no place in a new business. Pride in quality, service and attention to detail are all critical, and should be abundant in any business, new or old. But when it comes to attaining the necessary physical assets for a start-up or even an established business, pride — a word which too often is synonymous with Desire — doth quite often goeth before a fall.
Sure, a new CNC beam saw would be nice. But do you need it?
The company truck is looking a little rough, but it runs fine and your mechanic says it has plenty of good service left in it. At this stage of your business' development, what's the better decision: Buying a new truck and increasing that obligation substantially, or getting this one professionally painted and lettered, at a fraction of the cost?
Can you begin to see the distinction between Desire and Need?
If Desire is one edge of the Capital Expenditures sword, what's the other? It's Desire's opposite: Cheapness. Or put another way, Refusal to Commit.
Management guru Robert Ringer tells a great story about meeting a highly successful businessman who eventually made a fortune. The man had lost his house in the Depression years. Ringer says the man told him this key to making money: "All you do is charge the highest price for your product or service that the market will bear, keep your expenses as low as possible, and in between is your profit."
Pretty simple, huh?
If you're appropriately conscious about not getting cut by the first edge of the Capital Expenditures sword (Desire), the second edge (Cheapness) probably won't hurt you. The key words are "appropriately conscious."
There's a big difference between keeping expenses as low as possible and being downright Cheap. If you're not careful, that difference can manifest itself in an auction just as sure as Desire can (plus, you'll have fewer things of value to auction off!).
Cheapness is not, as some owners claim, cost containment in the interest of higher profits. We all know Cheapness when we see it, and it is always related to one of two things: The owner's inability to truly take the plunge and fully Commit to the business's success, or his total lack of interest in the safety and well-being of employees and customers.
The indicators of the latter are obvious: Dangerous working conditions, outdated or unsafe tools and equipment, lack of liability insurance — even inadequate lighting on the shop floor — all are good indications of Cheapness so profound as to constitute flat-out negligence.
Of course, readers of CWB are far too classy to ever permit such indefensible conditions of Cheapitude to exist in their shops. So let's turn to the Commitment thing.
Every owner of a young business struggles, to one extent or another, with this question: "Does this business really have a chance?"
Some, it keeps up nights. Others confidently move forward, just knowing that their venture not only has a chance, but has a bright future indeed.
Why? Why are some owners imbued with such total confidence that they find Commitment easy to come by, while others struggle mightily with questions of their company's viability?
In a word, will.
More than any other single factor, will — specifically the owner's will — determines a company's chances for success. Committed owners scarcely have to think about whether they'll succeed. They are so certain of the quality of the work they provide and of their ability to find a market for it that any questions about their success are answered before they can even be asked.
These owners approach Capital Expenditures based on Prudence. They keep one realistic — not idealistic — eye trained on the foreseeable future, the other carefully focused on the business' current realities. Then they make manageable investments in assets that satisfy both realms, knowing that, as the demand for their work grows, their capacity to produce it will grow as well — one Prudently chosen investment at a time.
Compare this with owners who operate on the Cheap. If they are not doing it out of sheer negligence, they are doing it because they are not confident of — and therefore not Committed to — success. They try to squeak by, awaiting some sort of divine indication that yes, this is their life's work.
Of course, it more often comes not divinely, but in the form of resignation. They resign themselves to doing average work and making average money in a field in which they have only average interest. And by the time that resignation kicks in, the Cheapness is too engrained to reverse.
So avoid getting injured by the two-edged sword of Capital Expenditures. You do that by leaving Fear, Desire, and Cheapness behind, and instead becoming Committed to your goals, and making Prudent investments based on realistic Needs.
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