Small Business Finance

Where to Focus Your Capital: Operations Versus Sales & Marketing

Written by Andrew Goldman for Gaebler Ventures

For many small businesses, capital is a scarce resource. The question arises, where is the best place to use this capital? The decision is often a choice between marketing and sales or operations. This article addresses this important question.

Small business owners tend to fall into one of two categories.

Either the small business owner is taking out loans from banks and/or friends and family or they are using their own savings to finance the business. In either case, capital is precious and limited. The small business owner must make critical decisions regarding where capital should be utilized. The key is to find where the capital will be best served and generated the highest return. This is no easy matter.

When it comes to capital expenditures, the main conflict is whether to invest the capital in sales and marketing or to use the monies to improve operations. While this decision is dependent on your particular business and your particular situation, there are common factors that can help make this difficult decision easier.

With Operations, a capital investment should lead to one of the following. Your cost should decrease as efficiency should increase or your quality should be improved. Typical Operations investments include; the hiring of personnel, new equipment or new facilities. In order to properly determine whether or not the operations capital expenditure is worth it, you need to make sure you have a good grasp on your cost accounting.

By having detailed pricing models and budgets, you can properly determine what the cost savings will be with the new operations capital expenditure. If you are improving quality, this can be more difficult to determine, but should include savings that result from customer returns. There is also the intangible factor of increased customer satisfaction due to decreases in defects.

Once you have come up with a dollar figure for savings from the operations capital expenditure, you can compare this number with what you will be spending. How does the return on investment look? How long will it take to break even on your investment?

Sales and marketing investments can be a lot less tangible than the countable savings that result from operations expenditures. Investments in sales and marketing typically include; hiring of new personnel, advertising/marketing programs and sales trips. While the costs of these programs are easily calculated, determining how much revenue will be generated from these options is tricky business.

If you have tried similar programs in the past, using the historical numbers is safe way to estimate possible returns. Since there are multiple scenarios that can result from these investments in sales and marketing, it is best to budget a "best case", "worst case" and "most likely" situations. The idea is to create the highest return on investment with your capital. Sales and marketing investments can usually generate higher returns, but they are more risky. The key is to determine the likelihood of the various scenarios and then spend your money in the most fruitful areas.

While capital investments in Operations are usually a safe bet, it is important to recognize the critical need for small business to increase their sales. Without increased sales there is no need to invest in Operations. In order to grow your business, you will need savvy sales and marketing. How much money to invest depends upon your product, your customers and your competition.

If your sales are steady and your customers are likely to repeat business, it may be a good time to invest in your Operations. This is especially true if you have serious quality problems. If you are comfortable with your profit margins and confident in your ability to attract new customers, the capital investment should be made in sales and marketing. For small businesses, the name of the game is growth. For this reason, if you can identify areas where sales and marketing investments can increase revenues at a profit, you should invest your capital in these areas.

Andrew Goldman is an Isenberg School of Management MBA student at the University of Massachusetts Amherst. He has extensive experience working with small businesses on a consulting basis.

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