Carefully Planning Your New Business Risks
A great business strategy is always to put two thirds of your energy into reducing expenses and one third into increasing income. The reasoning is that if you do what you can be sure of, you will get a real return on your investment of time and effort. For every dollar that you do not spend, you have a real dollar in your pocket. But the dollars you spend on marketing, promotions, or increasing productivity may or may not increase your income.
Your success at generating income is an unknown in the present. You see the results of your effort as you go along. Because creating income can’t be hurried up or known for sure in advance, the potential for loss and disappointment is very great. On the other hand, you can decide not to spend, or to reduce spending, in the present. And when you do, you will see the results immediately.
As far as time spent on something can be wasted, you can lose 100 percent of your investment in attempting to generate income, since it might not work. Don’t risk your whole business. Put the risk into only one third of your time and effort. Even after a business has been going for several years, the same strategy applies: When more net income is needed, put two thirds of your effort into reducing costs, because you can be confident of the results. Put the rest of your effort into improving your management and marketing systems.
Most people follow these same practices in their personal lives. They put the bulk of their discretionary income into secure forms of financial investment, especially if their equity in a home is counted. They reserve a much smaller amount for high-return, high-risk investments, thus choosing the known risk over the unknown for the major amount of their effort.
Putting this rule into practice is often easier said than done. Many people who ask for advice on a new business view money and time spent on getting new customers as certain to bring results. “My friend in direct mail assures me that a ten-thousand-piece mailing for $8,000 will get me four hundred new customers worth $35,000 in revenue. How can I pass that up?” This is the typical mindset of an inexperienced entrepreneur.
It is hard for people to see cost cutting as superior to marketing because they get swept up in the enthusiasm generated by the hoped-for future. You can’t control your customers’ behavior, but you have direct control over your own actions, so anything you do to cut costs is low risk and certain to pay off.