Are you being penny wise and pound foolish?

 

 

Penny Wise and Pound Foolish
Penny Wise and Pound Foolish

Have you ever heard the phrase penny wise and pound foolish? Have you ever been told that you were the poster child for this mindset?  Many small business owners can be caught up in this destructive behavior.  They will argue over a percentage point on their merchant fees while spending thousands on things that don’t advance their business.

This phrase alludes to British currency, in which a pound was once worth 240 pennies, or pence, and is now worth 100 pence. The phrase is also occasionally used for being very careful about unimportant matters and careless about important ones

Running a business is not like running a household, there are no coupons to clip.  Successful people have a growth mindset, one that sees abundance and solutions all around them.  A business owner that is concerned about saving $50 when they could be earning $5,000 in revenue is focused on the wrong things.  We will discuss in another blog post how cutting your way to profitability won’t work.

What you focus on grows – Penny Wise

We have all heard that what we focus on in life grows.  This lesson is especially true in business.  The more you focus on the minutiae the more those things will grow.  Stress over finance charges on past due invoices? You may notice that the number of finance charges you pay grows. Watch every expenditure on materials like a hawk? You may notice that your costs sky rocket.  Scrutinize your employee timecards for overtime? Do you reprimand them when they work extra? You may notice that your employee productivity or morale falls through the floor. By focusing on the negative outcomes in your business you invite more of those types of outcomes.

Pound Foolish

At the same time, some business owners see no problem with spending much larger sums of money on activities that do not benefit their business.  Take for example a company that moves payroll processors frequently to save processing costs.  These costs typically amount to an immaterial portion of expenditures for the year and yet are scrutinized regularly for savings opportunities.  The same company may spend tens of thousands of dollars in entertaining clients, travel to conferences, training & advertising costs.  Now some of these are absolutely necessary and have a fantastic ROI (return on investment) but some of them tank.

The problem is that most small business owners are not tracking the return they are getting on these expenditures.  They are not familiar enough with their numbers to tell whether that money was well spent or not.  In order to be able to evaluate what the ROI is on these initiatives, you need to be able to track revenue that was earned as a direct result of that effort.  In order to run an efficient business without pinching every penny until it squeaks, you need to know your numbers.

 

 Are you being penny wise and pound foolish?

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