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Just Because You Can Doesn't Mean You Should
Temptation is everywhere: a creative business idea, a new product line, or taking the afternoon off. As a business owner, you have total freedom to decide.
There are a myriad different ways to fill your entrepreneurial day. As a business owner, nobody will tell you what to spend your time on.
But, entrepreneurial freedom also comes with significant challenges.
Most entrepreneurs figure out the freedom part very quickly. Whether you fill customer orders, write a promotional newsletter, or take the afternoon off and go to the mall, you decide. Nobody will stop you.
But if you and your family have to live off your company's income, entrepreneurs suddenly face significant challenges. The most basic one is that your business must turn a profit that is large enough to pay for your living expenses, including housing, medical insurance, car payments, and your children's school trip.
Trivial? Not so.
That you need your company's income to pay your living expenses sets your business apart from many side hustles whose owners rely on other income sources, for example, a spouse's salary and medical benefits, to cover their expenses. These owners can afford to pursue low-profit opportunities because earning a living is often not their primary goal.
If your business isn't a side hustle, you usually have two goals.
For one, you must make the most from every hour you or your family members work to maximize your company's gross margin potential.
For another, you must keep your expenses low without limiting growth.
Sticking to these two goals can pose a formidable challenge.
Maximize Your Company’s Gross Margin Potential
Not every business carries the same margin quality.
Typically, services have higher margins than retail but are also slower to scale. Finding employees with the right skill set and an affordable salary can often be a significant obstacle to growth.
However, margin quality is only one factor determining your company's gross margin potential. The other is sales volume, or how much you sell.
In service, volume is the number of productive hours; these are hours worked on paid customer assignments. Increasing your productive hours maximizes your company's gross margin potential.
In retail, the math is a little simpler: sell more high-margin products and fewer low-margin products to create a product mix that increases overall profitability.
Keep Your Expenses Low Without Limiting Growth
Spending money on a new software product, cute fall decoration, or the latest smartphone is as easy as swiping your credit card.
But are these expenses all necessary?
What would happen if you didn't subscribe to the cool new software, used last year's fall decoration, or skipped a smartphone generation?
If your answer is "not much," why spend money on it?
Every dollar you spend is one dollar less your company can distribute to you to cover your living expenses.
However, spending too much is as dangerous as spending too little because a lack of investments can limit your company's growth or make it uncompetitive.
You don't want to overspend and waste your money on pet initiatives, nor do you want to underspend and hurt your competitive market position.
Prudent spending based on thorough business cases might be the most appropriate way to control expenses.
Should You or Shouldn’t You?
Keeping yourself busy is easy. There are a lot of opportunities out there that are emotionally rewarding but don't pay much.
In contrast, earning enough money from your work hours while keeping expenses low is much tougher.
The biggest challenge is finding products and services that meet your gross margin threshold and turning down those tempting opportunities that fall below it.
Picking winners and avoiding losers is an entrepreneurial skill. Even successful business owners who could splurge a little or pursue low-margin opportunities remember: Just because you can doesn't mean you should.
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