Identifying False Economies - Somewhere To

Identifying False Economies

In the job of running a business, one of the most important things you can do is avoid waste. When you’re small and just starting out, every penny is a precious resource and spending unwisely can mean you run your business into the ground before you really get going. All your resources need to go on finding an audience, ensuring you have the right product for them, and getting the two together.

Unfortunately, this sensible push for efficiency can leave you vulnerable to another common fallacy in business planning: the false economy. Saving money is good, but not if it’s a saving that costs you a huge amount down the road. To take a look at the most dramatic example of recent times, The All England Lawn Tennis Club – the organisation responsible for organising the Wimbledon Tennis tournament – was one of the few businesses in the UK to be holding pandemic insurance by 2020, meaning it received a payout of around £114 million when it had to cancel that year’s tournament. Many businesses would look at paying out for insurance for such an unprecedented event as a waste of money but it proved to be nothing but a sensible investment for tennis.

Not all examples are as dramatic, but today we’re taking a look at the issue to help you make confident choices about where to save and where to spend in future.

Being Alert for Future Costs

One thing to bear in mind when you’re making efficiencies is the risk of future costs. If you’re cutting costs in a way that downgrades your product, have you taken into account the additional costs of refunds and potential loss of customers and brand strength as a result?

If you’re looking at growth projects and don’t want to pay for growth strategy consultants to help guide that growth, have you accounted for the increased risk of anticipated problems and undesirable outcomes?

Future Potential

Another way you can make false economies is saving money in a way that harms your future potential.

The travel industry is a good example of this. There were huge cuts in staffing levels due to the collapse in numbers of fliers during the Covid-19 pandemic, but as a result major operators have struggled to staff up again and meet demand as it recovered. 

If you’re facing tough times and looking to downsize, try to keep a sense of whether this is an acute problem or a chronic one. Don’t hamstring your ability to rebound from a problem lasting months by making cuts that constrain your business for years.