As the economy begins to swing back upwards, business owners are asking “Should I be investing in people or equipment or in a building that my business could occupy?” For many of my clients, the answer is yes. But with many businesses recovering from tight cash flow the past year or more, it’s difficult to look at certain opportunities as an investment, not just a cost.
I have one client that is looking for a building, admittedly a unicorn type of building. One that has high ceilings and special power to meet the requirements of his business. Another has reached capacity at his current plant and is thinking about making a significant investment in a piece of equipment and building a second location for his business. Another is adding sales people and making leadership position investments in a VP of Operations and a VP of Finance.
At first, they look at these expenditures as costs or expenses, but for many, they’re investments. Why? Because a cost or expense detracts from cash or profit, but an investment is made expecting a rate of return.
My clients that are making investments in equipment and buildings believe that because of the improved capacity or efficiency, they can provide a return in excess of the cost of the investment. The client making people investments doesn’t look at these costs as increased overhead, she believes she can get an investment return on the collective experience and expertise of the people hired beyond the salaries being paid.
Any investment can either provide a return or a loss depending on the investment and time horizon. However, these business owners believe the opportunity for reward outweighs the risk of the investment. So, they’re going for it and that’s what being an entrepreneur is all about. Right?
So, if you’re looking at making a change, whether it’s hiring people, buying a building, purchasing equipment, or something else, make sure to ask yourself these 3 questions:
- What’s my expected rate of return?
- What’s the time horizon I’m willing to wait on the return on this investment?
- Do the market conditions indicate a favorable outcome?
These will help you determine whether you’re making an investment or incurring a cost and if it’s the right time.