So expenses versus investments.
The moral of the story here is that not all cash flows are going to impact your
business the same. So looking at the definitions as we start out here,
an expense is just a use of resource for normal operations.
It might not impact your revenue directly,
but you're going to have to do it for continued operation of your business.
So examples of that would be like your electricity bill.
Paying your electricity bill doesn't necessarily help you grow your revenue,
but it keeps things running. That would be an example of an expense,
whereas investments are using those resources to actually try and create a new
asset,
which is going to result in additional revenue generation
down the road. So some examples, like I said, utilities,
taxes, paying taxes does not make our business any better.
It just keeps us outta jail. Banking and transaction fees, normal courses,
stuff to have your money, uh,
processed rent and lease insurance and marketing.
Now I have asterisks ASEs next to leases and marketing
because some situations those could actually be considered investments.
For example, if you have a lease or lease to own contract set up,
where at the end of your lease term you have the option to buy the facility,
that could be looked at as investing in eventually having that asset.
Same thing for marketing.
You could look at it as putting those funds into ads per se,
growing your, uh, customer base or people who see your, um,
product could be considered an asset. Or if, for example,
if you're making marketing materials. So an e-book,
it's a marketing thing for marketing,
but it becomes an asset because it helps you bring in new customers.
So we can look at these a couple different ways.
The main thing to look at for expenses is once you stop paying for them,
they don't usually continue to give you benefit.
And then when we're looking at minimizing or avoiding unnecessary expenses,
obviously that's going to increase our net revenue. So looking at, for example,
decreasing our tax liability,
we have to categorize those things properly.
It may be, uh, accounted for differently based on their expected, useful life.
So this is when we're considering is it a capitalized expense or is it just a
regular expense?
So capitalized stuff means we can actually put those things on our books,
um, as a, you know, an asset per se.
And so we have to look at what's the expected duration of the benefit
that we're getting from this thing. So for example, as you are, you know,
building a website,
you're not currently getting a benefit from that website while it's being built.
You could capitalize that expense and put it over as an asset, uh,
essentially on your balance sheets. And then once it is in play,
then we start reaping the benefits
Of that. So we have to account for those differently when we're, you know,
going through our accounting system investments, like I said,
website, uh, buying new gym equipment or just equipment in general.
This could be computers, uh, screens, lighting, videography equipment,
all of those things that you were going to use in the normal course of business.
Uh, investing in producing content, whether that's paying other people to edit,
design, write, um, education obviously.
So like paying for this course is an investment in your own knowledge and your
ability to hopefully be a little more efficient as you run your business in the
future. Employee pay, I have that, um, as an asterisks.
It could just be an expense if you're paying someone to do, you know,
the same job medial over and over and over again, um,
compared to paying an employee where you're actually like training them to
do a more productive task or helping them expand
their knowledge so that they then become more useful to you in the
future. Marketing. And we already covered that one.
So you're gonna expect to see a return on your use of,
of investments that is going to exceed your initial investment over
some period of time. When we're looking at these investments,
the goal is of course to drive our growth.
So what we need to look at when we're assessing an investment or determining if
we want to make an investment is just a simple breakeven analysis.
So we want to ex have an idea of how long it's going to take for us to
get that revenue back and then actually start making money from it.
That analysis going to help us, um, potentially avoid cash flow restrictions,
right? So if we have, you know, unexpected expense that comes up,
have we been putting so much into this investment over here that now we are
essentially cash poor where we don't have the cash to cover something that may
come up?
So that's what we talked about in the budgeting mo in the budgeting unit about
making sure we have kind of a safety net or a buffer of cash.
So we need to have that idea as a part of our business plan before we start
diving into these investments. And the um,
and simple analysis for that timeline is just going to be what's the initial
investment divided by our profit margin?
So quick numbers example here to kind of conceptualize that.
If we're investing $10,000 and we're expecting that it should
increase our net revenue by about 20%.
So we say our current revenue is 4,000 a month, 20% increase,
our expected would be 5,000 a month.
And then we throw the numbers into our little formula there.
So the investment di divided by the profit margin would make it about
$50,000. So if we're making $5,000 a month,
it would take us 10 months to hit that breakeven
Point on a $10,000 investment.
So that's a very simple way you can kind of get a general idea. Again,
this assumes everything goes exactly to plan.
You're getting exactly 20% every single month.
I would always advise being a little conservative on your estimates there,
just so you have kind of a, a safe window. Uh,
and it's better to be more prepared for this to take longer than have it take
twice as long. And then you're kind of in the hole, so to speak.
When it comes to cash,
we also have to accept that every investment is risk. It might not all play out.
We might not get 20%.
How long can we afford to wait to actually recover that initial, you know,
$10,000 investment? Um, or what if it just doesn't work out at all?
That's always a possibility.
Or what if other expenses arise out of this investment? You know,
when building a house or building buildings like contractors go over budget all
the time, is it going to take you exactly $10,000 to, you know,
complete that upgrade on your website? Are other costs going to come up?
Are there, you know,
roadblocks that you might have to pay a little bit more to work around?
We'll need to account for these in our budgeting as a part of our business plan,
again, to make sure that we don't end up in that, you know,
80% that fail in the first year or 50% that fail in the first five
years. So looking ahead again,
being conservative on our estimates to get a realistic expectation of where we
want to put our money, um, and when we want to do it.
So as we move on next, we're gonna head into a little bit more of the,
uh,
kind of technical side of things and gives you some tips on how to move forward.