Of course, there are fixed expenses, those recurring bills for phone, internet hosting/website, etc. But after those bills are paid, how much should be set aside for marketing, for education, for inventory, and to pay yourself?
The answer is simple. There isn’t an answer.
There are lots of numbers tossed around in the accounting world. I’ve heard 20% of profits should go back into marketing, etc. But these are just numbers. To be honest, it’s a very individual decision that each business owner has to make for him or herself.
When you first started your business, you should have created a feasibility plan with a projection of income and expenses for the first 3 – 5 years. But, once again, these are projections. And projections are basically educated guesses. In an ideal world, your projections would be pretty accurate, or better yet, your profits would be more than predicted and expenses would be less. But, as we all know, this is not an ideal world and finances are never black and white.
It’s all too easy to forget to include some expenses and there are frequently unexpected surprises. The economy changes from month to month and profits differ from season to season.
Creating a budget is a good starting point but that is based, once again, on guess what? Guesses. I suggest that you begin by putting aside the money needed to pay any fixed expenses PLUS a nest egg to cover those unexpected expenses. Each of us would know what amount we would feel comfortable saving for a rainy day. It makes it easier to track if you use your accounting program to separate these amounts into individual accounts such as a tax account, a rent/utility account, etc.
Then we come to the hard decisions – the how much do you put into marketing, education etc.
It all depends what you need and when you need it
This is a good time to look carefully at your marketing plan for the whole year. Can you do most of your marketing on a shoestring using networking, internet mailings, etc. or does your business require costly advertising such as newspaper/magazine ads, yellow pages, radio, and direct mail. If you use these more expensive advertising venues, keep careful records and determine what your return on investment is for each type of marketing. You may find that even though you get more orders from a large newspaper ad, the cost of that ad could drastically reduce the return on that investment.
Only you can say how much your marketing budget should be and where it should be spent. But you can’t afford to just spend money without tracking return. Sometimes, investing time into marketing can be more valuable than spending money. But you never know unless you’ve tracked the returns.
Regardless of how long you’ve been in business and how well known you are, education is important. Times change. Methods of marketing and even techniques and new products evolve. Investing in a quality magazine that not only keeps you up-to-date but also makes you think is essential. And reading books, magazines, and even newspapers not related to your industry are important as well. A well-crafted ad for a product in an entirely different industry can trigger an idea for your product.
On-line forums and communities can also provide valuable education depending on who is contributing to the conversations. Be careful of these and remember that “anyone can create a whole new persona for him or herself on the internet”. You want to make sure that the people giving the advice have walked the walk and made the mistakes that you want to avoid making.
Basically, how much you should spend comes back to your long-term plan for yourself and your company. Where do you want to be in one year, in three years, or five years? What do you need to learn and how do you need to market in order to get there?
What skills and techniques do you need to learn to increase your marketing and production ability? Will these skills justify the cost of getting them? Technology changes so quickly that it’s hard to forecast what you’ll need in five years. Some training may be available for free while you may have to pay for others. But don’t make the mistake of thinking that you’ll decide what you need as you go along. Even though you may make adjustments along the way, you must have somewhere and something to aim for and determine how you are going to get there.
After saying all this, everyone’s answer is different.
It all comes down to a combination of your personal situation, the goals you’ve set for yourself and your business, and how badly you want to achieve them.
Share with us how you are deciding the breakdown for your business investments.