Most often, the term “penny-wise, pound-foolish” is used to describe someone being prudent or thrifty with small amounts of money – take care of the pennies and the pounds will take care of themselves. But it can also be seen as being wasteful when you make decisions about small dollar transactions that end up making bad sense on large scale transactions.
I think that penny-wise, pound-foolish is a great saying, and in my line of work, I use it often because not only do I work with established companies, but many of them started off as startups that often made these mistakes. I’m guilty of it myself, but I have learned in the long run that operating with a cost-conscious mentality and remaining lean does not mean that you disregard the cost benefit or trade off in value.
As an entrepreneur, keeping a startup mindset and culture are great when you are working with a limited and tight budget, and almost always necessary, even if you have access to capital. In the early years of operating, saving pennies helps to make payroll and keep the lights on; low cost budget ideas and strategies are almost always needed to get over the early stages, like flying economy class rather than business class to save $10,000. However, keeping this mindset and cutting corners on small dollar transactions can sometimes cost you to pay dearly in the long run.
Many entrepreneurs lack certain line items in their budgets and end up missing opportunities or try the do-it-yourself (DIY) route; this is what I refer to as penny-wise, pound-foolish entrepreneurship. It’s flowing through all of your personal transaction through the business to save on bank fees. It’s like starting a partnership without an attorney and a well-written operating agreement outlying the roles of each partner in the event of a dispute. The accountant would take many hours just going through records trying to distinguish between personal and business funds or the partnership incurring hefty legal fees between partners during a misunderstanding because the operating agreement doesn’t include the right language to handle the dispute. It is good to evaluate the merit of your decisions: how efficient or productive it will be for your business and will it cost more later, is what I tend to look at when I am faced with penny-wise, pound-foolish decisions.
Here are five line items you should not cut back on your budget to avoid saving a penny and paying a pound later. Factor in the cost for these below when it makes sense.
- Separate business and personal transactions by maintaining separate bank accounts and invest in record keeping logs to help track assets owned by the business.
- Invest in an accounting software, there are some reasonably priced software at your local office store. If you’re not tech savvy, purchase an accounting journal entry book to help you track your transactions manually.
- Properly classify employees versus independent contractors, the taxes and penalties associated with not determining who is an employee can be hefty in the long run.
- Seek professional advice on the front end; allocate some of your budget to include the consultants that you may need. This may be to hire an attorney, accountant, human resource specialist, business adviser, IT consultant, business coach, etc.
- Hire an administrative assistant or office manager to handle administrative affairs, it is a better use of time for the business developer (most often this is a founder) to concentrate on handling high valued task and assignments.
Most often, I am at the tail end of helping entrepreneurs resolving penny-wise, pound-foolish decisions. I think no matter how big or small your operations, it is always helpful to create a budget or forecast of your business needs to help you monitor, manage and plan for a good investment. You have to learn how to invest your money wisely if you want to succeed in your business, this makes good business sense.
Gerri Lazarre, CPA, MsTax is a certified public accountant and principal with TriMergeCPA and TriMergeTax in Miami, Florida. Lazarre specializes in providing professional advisory services in the areas of accounting, audit and tax planning to individuals, businesses and nonprofit organizations for more than 13 years. For more information, please visit www.TriMergeTax.com and www.TriMergeCPA.com. Connect with Gerri on social media at Twitter.com/TriMergeCPA, Twitter.com/TriMergeTax or https://twitter.com/GerriLazarreCPA.
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