Understanding the Difference Between an Investment and an Expense

Mike Harden | | Solving Problems, Thinking Strategically

What’s the difference between an investment and an expense? If you’re not sure, ask your spouse. He or she will tell you that, no; a 75-inch plasma screen TV is not an investment, no matter how good the Super Bowl will look. In business, ideally, you don’t have expenses. Just good investments. The difference is simple: one will start paying you back, and the other is a drain on your resources.

A Bottom-Line Distinction

Viewing all spending as investments instead of expenses will help guide better decisions. Say you need a new copier. Do you need it to be the top-of-the-line $8,000+ model? Do you want to buy it outright, make payments, or lease? You have to balance the initial and ongoing costs with the return. How much do you have to spend to get the functionality you require? And what is the best way to get it? Are you making an investment in the machine you need or are you incurring an expense by adding superfluous features or disadvantageous owning or leasing conditions?

This same line of questioning applies to office furniture, to cloud computing vs. internal servers, to computers, to people. Your A players aren’t afraid to challenge your assumptions and ideas. They will help inform these decisions, telling you that you’re wasting money – or that you’re being a cheapskate.

Very few items are straight expenses. If they are, why are you spending the money? Here’s an example: say I’m paying for direct mail, and it is generating just 1 percent of my leads. At this point, it’s not an investment. When it’s not paying for itself, it becomes an expense – one that I should clear from the books. There is a better use for those funds, an investment that can be made instead of an expense that has to be paid.

The Most Important Investment

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The single most important investment you will ever make is in people. When we get cheap here, the business suffers. CEOs tend to drop the ball, asking themselves, “What will it cost to hire this person?” The employee, then, becomes an expense. What we should be asking is, “What is this person worth?” While we’re at it, what are we worth? What kind of investment can we make in our own leadership and develop that will benefit both our careers and our organizations?

With Vistage, for instance, there is an upfront cost associated with membership. The advantage – the investment – is that you will make more money, make better decisions, and run a more successful business. Here’s another example: what if you spent $20,000 a year to have an advisory board? That’s a significant expenditure but it is not an expense. For $20,000, or about 2 and a half copy machines, that advisory board could keep you from making one $200,000 mistake.

Par down your expenses, and put your money into places – and people – that will drive your business forward. An investment in A players, in an advisory board or peer group, or even a good cloud-computing system or other assets will repay your business and help accomplish key goals. If they don’t, they’re expenses you can do without.

Mike Harden

Mike Harden has developed exceptional depth and breadth of knowledge over his 40+ year career as an entrepreneur, executive, teacher, mentor, and coach. Today, as one of DC’s premier Executive Coaches, Mike helps good executives become great leaders. Find Mike on Google+

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