5 Penny Pinching Pitfalls for Business Owners

Pinpointing ways to save money for your business is a good thing. It helps you instill a lean operating mentality and creates discipline to put every dollar to work in the most efficient manner. 

Anyone who’s ever bootstrapped a business knows all about the art of doing more with less. Stretching budgets can be a survival skill that keeps you always looking for ways to save a buck.

Penny PinchingBut if your goal is cost cutting at any cost, watch out, says Sean Castrina, a business coach and serial entrepreneur who’s started 15 businesses in several industries. “Too many business owners don’t merely visit Cheapskateville, they set up shop there permanently. Avoiding unnecessary expenses is one thing; being a perpetual penny-pincher driven by fear is another. And too many people can’t see the difference.

Cheapness in some areas can damage your brand, cheapen your product or services in the eyes of customers, and come back to haunt you. “Subject each cost saving measure to this litmus test: What are the possible short- and long-term effects of this decision,” says Castrina, author of 8 Unbreakable Rules for Business Startup Success (Champion Publishing, 2013). “Will it save my business money without negatively impacting profits later on?” Sometimes the answer is no.

Here are five places small businesses should avoid pinching pennies TOO tightly:

Penny-Pinching Pitfall #1: Paying employees the bare minimum

.  Excessive tightfistedness on payday sends a clear message to your employees: “I place a low value on you and what you do for my company. I don’t see you as a person with talents and unique abilities, but as a debit on my monthly expense report.” And that, Castrina points out, is the kind of message that sends skilled employees running for the hills, costing you money in lost productivity, turnover, and customer dissatisfaction.

Penny-Pinching Pitfall #2: Using an in-house bookkeeper.

Why is this a problem? According to Castrina, too many boss-designated bookkeepers don’t completely know what they’re doing. They may use unnecessarily broad headings or classify items incorrectly. Sooner or later, your accountant (or IRS) will charge you to correct these mistakes, saving you nothing. “The larger problem is that it’s easy for an in-house bookkeeper to steal from you,” Castrina says. “It’s happened to me. Now, I’m adamant about hiring a third-party bookkeeper who reports to me directly.”

Penny-Pinching Pitfall #3: Skimping on legal services

.  Castrina recalls going through a touchy legal matter several years ago. When he described the matter to an older business colleague, his colleague said “Your attorney is a nice guy, and he’s good with general matters, but for this situation you need someone whose name strikes fear into the heart of opposing council.” Castrina took his colleague’s advice. “And I’m so glad I did,” he says. “The matter went away quickly and was some of the best money I ever spent on higher-priced billable hours.”

Penny-Pinching Pitfall #4: Going DIY for your most important branding materials.

We’ve all seen a business that made a poor impression because their signage wasn’t professionally created or their forms, brochures, stationery and website were all poorly designed. Customers are always going to judge businesses by their covers. So if you want to be paid like a great company, you need to look like one.

Penny-Pinching Pitfall #5: Relying only on word of mouth

.  “If I hear one more small business owner tell me that he or she believes in ‘word-of-mouth marketing,’ I may scream!” says Castrina. “Don’t get me wrong; customer referrals are powerful and can really help drive your business. But I’ve never owned or worked with a company that owed more than a third of sales to word-of-mouth. If you try to save money by not budgeting for marketing, you’ll save your way right out of business. You simply must spend money to attract customers.”

 Bottom line: If you skimp on something that directly affects your customers or that compromises your ability to operate efficiently, your efforts will probably backfire. It’s good to be frugal. But it often doesn’t pay to be downright cheap. 

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About the Author

Daniel Kehrer, Founder & Managing Director of BizBest Media Corp., is a nationally-known, award-winning expert on small and local business, start-ups, content marketing, entrepreneurship and social media, with an MBA from UCLA/Anderson. Read more of Daniel's tips at www.BizBest.com, follow him at www.twitter.com/140Main and connect on LinkedIn at www.linkedin.com/in/danielkehrer.