What Is the Relationship Between Finance and Thrift in Business?
The Relationship between Business Debt and Thrift
Thrifty companies will focus their efforts on better managing their resources. The baseline assumption will not be to buy a new item for the tax benefits of depreciation, often the equivalent of going $100,000 into debt for a house and saying that the 25% mortgage tax deduction of $250 per month is a good deal for the $1000 per month house payment.
Many business owners succeed because they are thrifty, in essence, careful money managers, just as most millionaires who achieved that status by limiting spending while saving and investing.
One of the links between finance and thrift is an aversion to debt. You don’t have to spend money saving money if you control your costs through up front management of expectations and desire. By limiting goals to what is practical and achievable in the short term, thrifty business owners are less likely to go into debt as well as receive higher returns on these investments.
Thriftiness and Long Term Growth Prospects
If your business is not cautious or thrifty with its money, it may waste money on executive perks, wasteful catering, unnecessary conferences or bloated payrolls. This increases its baseline spending and forces difficult cuts later on as well as a faster drain on corporate savings (retained earnings) if income drops. If a business isn't thrifty, it will burn money at a higher rate and is at greater risk of going into debt for expenditures without any return on the investment.
Thrifty businesses often follow a different growth pattern than their boom and bust peers. Thrifty business owners will save up cash to start the business or try to grow the business on the side while working for pay elsewhere. Instead of rushing out to get loans and open a big office, the thrifty business owner starts small in a garage or home office. Many dot-com businesses failed because they had an idea and tons of financing but no real business plan or experience.
They blew through the money setting up offices and on marketing but had no real customers or proven product to offer. Thrifty business owners will have the cash to start and minimize loans that create payment obligations while building up business experience that helps them get good loan terms in the future if borrowing is necessary.
Impact of Thriftiness on Human Resources
Thrifty managers will cultivate internal talent to minimize the cost of hiring and training new people. Internal talent that becomes more skilled is capable of filling many more positions, increasing the work group's flexibility. And offering training to internal staff is a cost-effective way of improving their loyalty and morale.
Thrifty businesses will balance salary with benefits. Businesses that offer top dollar up front will struggle to meet head count when they start to approach their budget's limit. Thrifty business owners research the prevailing wage and then offer it. They will sweeten the deal for key personnel and those with essential skills. They will also research low cost perks or no-cost benefits like schedule flexibility that help employees without costing a ton of money.
How Thrifty Managers Manage Their Businesses
If a business has thrifty managers, they will be more likely to cut failing projects instead of pouring good money in after the bad. Keeping bad projects going is not only a waste of money but resources that could be put to use more productively.
Thrifty managers will manage maintenance schedules, supervise repairs and attempt to extend the life of equipment instead of ramping up capital costs.
Thrifty does not automatically create bean counters that are a penny wise and pound foolish. Thrifty managers will jump at small expenditures like a new, faster component placer or more efficient CNC machine that will greatly boost throughput.
Thrifty managers will avoid all types of debt. Financial debt results in future monthly payments that dampen future cash flow and may force businesses to work harder to have the same profit level next year. Thrifty managers will also minimize technical debt, the massive backlog of undone project work, which requires costly overtime or contract labor to repay when deadlines approach.
Thrifty business owners invest in their businesses first and foremost. Instead of taking a large salary, they take enough money to live upon while growing the business or paying down its debts.
Thrifty business owners don't rush out to get the latest gadgets or software. They will buy what they need to get the job done. If the engineers need the latest data management software to retain a key contract, that software will be bought. However, business owners who are wise with their money will not rush out to upgrade computers or corporate phones simply because a new one is available.