Four money decisions every entrepreneur must make

Kenyan currency [Courtesy]

Being an entrepreneur, you will have to make tough decisions almost every day.

This is both the most exciting and the most stressful part of owning a business.

While most of your daily decisions will have relatively small impact on the success of your enterprise, some decisions will have a huge impact that can be either positive or negative.

The most hard-hitting decisions are those of a financial nature. These will affect your cash flow and consequently affect every other aspect of your business. In fact, one of the biggest reasons why small businesses fail in their first year is poor financial decision making.

The well being of your business largely depends on your ability to make sound decisions – whether big or small. With that in mind, here are a few big financial decisions every entrepreneur should be prepared to make:

Product and service pricing

Setting the price of your products and services is a major financial decision for every entrepreneur. The price you chose will impact every aspect of your business from cash flow, profit margins, staff salaries, and whether you can afford to expand your business. If you set the price too high, it might turn off potential customers, while prices that are too low will mean lower profit margins.

Unfortunately, there’s no one-size fits-all formula for deciding the right price for your products or services. To make the right pricing decisions, you have to employ various strategies informed by your costs, the prices set by your competitors, your core business strategy, and what your target customer is willing and able to pay.

Out-sourcing or hiring internally

In the early stages of a business ownership, you might be able to handle many aspects of the business by yourself or with a business partner. However, in a successful venture, it comes to a point where you must hire employees to help you with the day-to-day tasks of running a business.

At this point, the big question is: “Should you outsource some tasks or hire in-house employees? Unfortunately, no one can tell you which one is better for your business. You have to weigh different factors and come up with a decision that is most suitable for your situation.

Freelancers tend to be cheaper than employees in the long run. And unlike what most people assume, that isn’t because freelancers charge low hourly wages. It’s because they tend to be more cost efficient than in-house employees.

Other than their salaries, employees come with additional costs such as health coverage, retirement benefits, leave days and so on. You also have to factor in the costs associated with recruitment and training. Full-time employees can also get bored with routine and become less productive.

Since freelancers are paid for specific services, they’re more motivated to produce high-quality work. You don’t have to provide them with health insurance, retirement benefits, or pay for leave days. In addition, they typically use their own equipment (such as laptops or cameras) to work and work from home – saving you money you’d have spend on office space and amenities.

The type of job or role, your company culture, the industry and its competitiveness, and what you can afford are key factors to consider when determining whether you should hire a freelancer or in-house employee.

How much to spend on marketing

To make money, you have to spend money. This is a common saying that means that without investing some money in supplies, inventory, sales, and marketing and other business expense, it will be hard to make profits.

For your target audience to be aware of your products and services, you have to put some money into marketing. You can market through both online and offline channels such as social media advertising, Google ads, content marketing, mainstream media ads and so on.

While marketing is important, small businesses owners struggle with deciding how much money to allocate to it. When you’re just getting started in business, it’s difficult to spend money on marketing as you’re still worried about inventory and other business expenses. But unless you invest in marketing, your target audience won’t even know that you’re offering the products and services they need.

Business experts recommend that you consider spending 10-15 per cent of your revenue on marketing. This might feel like a lot when you have plenty of other expenses to worry about. However, if you skimp on marketing, you might not have a business to worry about in a few months.

Whether to expand your business

Should you keep your business small or expand it as soon as possible? Every entrepreneur dreams of scaling their business to even greater heights. Expansion comes with the promise of access to wider variety of financing, increased levels of production, attracting more qualified staff – all of which ultimately translates into more revenue.

However, the decision to scale up your business is not one to be taken lightly. Expanding a business is an arduous, complex process that many entrepreneurs tend to underestimate. Scaling a business too fast or too soon can create cracks in your business foundation that will bring it crumbling sooner or later. One study found that 74 per cent of high-growth start-ups fail due to premature expansion.

Before you make the decision to expand, make sure that you have proper systems and processes in place to maintain quality and consistency of your products and services. In addition, study the market conditions to ensure that your expansion will be successful. Whatever you do, don’t try to cut corners when scaling your business. Compromising your core business values for quick growth is likely to backfire.