False economies are a small business owner’s worst enemy. Many start-ups fall victim to false economies, struggling, as they often are, with very limited budgets. But what seems like a thrifty choice can often end up costing you in the long-term.
It is important that you understand how to identify and avoid false economies – but it is equally important to know when adopting a DIY approach to tasks is best for your business.
What are false economies?
A false economy is a choice that saves you money in the short-term, but which eventually proves to be wasteful. False economies are a common trap for small businesses – particularly those on a tight budget.
False economies frequently occur when you choose to carry out a task yourself, rather than pay someone else to do it. For example, say you need a website built for your new business. You get some quotes from web designers, and they tell you it will cost £1,000.
Rather than spend the money, you decide to do it yourself. You buy some cheap web design software, and start to learn how to use it. You build a basic website, which takes you five working days. The website doesn’t look as professional as you had hoped, and six months later you pay a web designer to overhaul it.
This is a classic case of the false economy. Nominally speaking you saved yourself £1,000. But you lost five working days – so you must factor in both the earnings you sacrificed as a result, and the opportunity cost. On top of this, you ended up having to hire someone to finish your work anyway. In total, your website ended up costing significantly more than the £1,000 you would have spent if you had just paid someone to do it in the first place.
Value - not price
Value and price are two very distinct concepts, and yet many people fail to differentiate between them. You need to take both value and price into consideration when deciding whether to make a purchase.
Bootstrapped small businesses are often reticent to spend any more money than they absolutely have to. While there is obviously some sense in this approach, it is important that you are able to identify when an expenditure represents good value for your business. The old adage that you must spend money to make money is, in many ways, rooted in fact. Some expenses are unavoidable – and some will help to deliver success for your business in the long-term.
Should I do it myself?
Of course, this is not to say that you should outsource every task with which your business is faced. There are plenty of circumstances in which it is better to go DIY. When deciding whether to outsource, consider asking yourself a few questions:
• Can I do it well enough? Are you able to complete the task
properly yourself? If not, don’t be tempted to hash it out in order to
save money. Generally speaking, if something is worth doing, it is worth
• Will it take me away from doing my job? Will completing the task take you away from your core business? What will be the actual cost, and the opportunity cost, of that lost time?
• Can I afford the expense? Will paying someone else to carry out the task cause you cashflow problems?
• Will learning benefit my business? Is the task likely to be repeated? If so, should you learn how to do it yourself in order to save time and money in the long term?
False economies are a common trap, and one that you should take pains to avoid. By thinking carefully about the long-term implications of tasks and expenditure, you can help to make sure that your business gets the best possible value for its money.