How Much Do I Invest Back Into My Business?

I thought this was a great question and one that is often misunderstood in small business. There is no right or wrong answer to this question. In my experience it all depends on a few factors.

Let me start with an important point that must be understood before we begin to discuss the topic question. The difference between an “investment” and an “expense” is: A Result. Therefore it is critical to understand that the desired outcome of ANY investment in a business is to produce a result greater than the investment itself. Keep in mind that not everything spent in business is an investment (expenses are a good example).

Now let’s look at another critical distinction. Often an investment decision has to be made from something that is NOT proven – a sales system, a new product, a new relationship, etc. This is what is referred to in business as the “innovation stage”. As you can see from the chart below, it is one of the 3 key areas of business.

Innovation is a CRITICAL part of any business. However, it is also the stage where most businesses fail. In other words, most businesses fail to ever determine how to sustain a profit. If you are skeptical about this, note these business failure statistics:

Business Failure Rates (Pre-Recession):
1 year – 50%
5 years – 80%
10 years – 96%

Here is a simple rule to remember about investing in the innovation stage of a business – the less you invest and the shorter time it takes to find solutions that enable you to move toward the “marketing stage”, the greater your probability of success. This follows a simple principle that says: Invest carefully as you are “looking for an answer” but aggressively when you “have an answer”.

As I noted in a prior blog, I have found that there are 4 key components that must be invested into in any small business:

1. Proven People – the best way to judge a proven person is by answering 3 simple questions. Can they do the job? Will they do the job? Are they the right fit? If you can involve a proven person in your business or business culture AND you can answer “yes” to these three questions, then it is worth investing in these people. Sometimes the bigger issue is how much to invest or how long to invest before you get a return. There is more that goes into the analysis needed to answer those questions, but I can tell you without reservation that you need proven people in order to have success in business. Equally, it is critical to understand that investing in someone that is not proven (see the 3 questions above) can damage your business as much as investing in the right people can make it successful. Determining “Proven People” early in the relationship process is a great skill to have in business.

2. Proven Products, Systems, Processes, etc. – This is a simple concept to understand. These items are typically a part of the “Innovation Stage of Business” that I described above. Therefore, it is often easier to align with a business culture or opportunity that has solved these typical innovation strategies than to figure them out on your own. If you can find such a culture, then your goal is to “learn” vs. “create”. For many small business owners, this is a key factor in their success, limitation of investment in their business and the speed at which they can make a profit. Why try to figure out all the unknowns of the “Innovation Stage” when you can get involved with an “Opportunity” or “Business Culture” that has already spent the time and money to figure it out?

3. Innovation – Now how confused are you after seeing that you have to invest in “Innovation”? I just told you that Innovation is the most difficult stage of business and now here I am telling you to invest in it. Here is my point. The only constant in business (and life) is CHANGE. Therefore, a long-term business learns to embrace and “proactively” manage change. Often if you are involved in a large “business culture” vs. a small “mom and pop” business, this aspect of the business process is controlled by those that run the business culture. If this team is “proven leadership”, this really can help you keep your business successful. However, if leadership cannot manage change, I believe it is only a matter of time before everyone in the business culture suffers from that deficiency.

4. Personal Development – There is a principle that is important to embrace in business – You grow before your business grows. Having a business is not like a job. You have to learn many skills and wear many different hats. You have to learn to get the best out of yourself, but also how to build and cultivate relationships that will have a major impact on your business success (and happiness). I can tell you that EVERY long-term successful entrepreneur I have met preaches personal development as a key to success. Those who have grown successful businesses know that their personal development was a major factor in their ability to succeed. Even more important, their personal development growth paid dividends well outside their business (relationships, happiness, giving back to society, etc.). In many businesses, the biggest factor that will determine your success or failure is YOU.

So in closing, I think the fact that you want to invest back in your business is a GREAT SIGN that you understand the importance of this strategy. The simple truth is that investing back in a business is mandatory for the business to grow and succeed. I hope what I shared above will help you to “invest wisely”. Experience has taught me that those who invest wisely tend to reap returns that are much greater than their investment. Equally, I have seen many businesses fail because of “unwise investment decisions”. Be smart with your decisions. If you find something that works, feed it. That is a key principle of all successful businesses.

(I have had a tremendous response from my “send me your questions” request, and will continue to answer your questions throughout the coming weeks. If you have a question that you would like for me to address please feel free to email me at gordon@gordonhester.com.)