Difference Between Business Expense and Investment

by Charles T. Wilson on May 7, 2012

It’s easy in a rough economy to misunderstand the difference between a business expense and an investment.  They both look like the same cash out the door!  Unfortunately, when expense cuts are across the board, the law of unintended consequences can rear its ugly head.

Short-sighted ~

I remember my employer, a major insurance organization, responding to a similar economic period in the late 1970′s.  They decided not to hire the usual crop of trainees for one year.  Not recognizing this was an investment, rather than an expense cost them dearly in huge staff and skill gaps for about five years.

Risk management, including safety, loss prevention and mitigation are often put on the chopping block in times like these.  For some firms it feels easy to cut this “soft” stuff:  “We’re in good shape.  What could go wrong?”

Large company risk mangers know the consequences:  it costs $7 to $10 to fix a safety or risk management issue than to invest $1 in preventing it up front.

Business Insurance recently reported what can happen:

  • Tighter budgets, less attention to safety and stretched labor can lead to MORE ACCIDENTS;
  • Less managerial oversight often encourages ETHICAL PROBLEMS;
  • Layoffs can bring LIABILITY AND DISCRIMINATION CLAIMS, SUDDEN “INJURIES,” and LONGER CLAIM PERIODS for workers’ compensation.

What you can do ~

Doing more with less is often a necessity, at least for a while. What’s important is not losing sight of your long-term strategies.

  • Discuss problems openly with staff to get understanding, ideas and buy-in.
  • Get input for effective change implementation – how can you maintain key priorities and the needed oversight to make this work.
  • Everyone’s got to know you’re not downplaying quality products and services or worker and public safety:  talk it up and walk the talk.
  • Discuss gaps with your insurance professional or broker and other suppliers.  Ask them about ways to get – often free – value-added training, risk assessments, loss control inspections, testing and other help.
  • Remember some investments have intangible benefits, like professional advice that allows management to be more focused and productive, avoids problems, or reduces stress, hassle and distractions.

What’s your Return on Investment?

Insurance rates are already climbing and expected to go higher this year.  Insurers are clamping down and restricting coverage.  This is definitely not the time for you to have additional claims or look like you’re doing a sloppy job with your risk management and loss prevention basics.  High priority attention and some investment here will pay off over many years to come.

What’s your experience in this area?  How hard is it to distinguish between an investment for the future and just an expense?

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6 comments on “Difference Between Business Expense and Investment

  1. Charles T. Wilson on said:

    Thanks, Mike – I think those are very useful distinctions.

  2. Mike Van Horn on said:

    Charles, I want to propose adding a category to your “investment vs expense:” I.e., “insurance.” I’ll define them:
    Expense. Money spent to produce your product or service or to keep your operation running. It keeps you going.
    Investment. Money spent to upgrade or expand your operation, on which you expect to get a positive rate of return. It makes you money.
    Insurance. Money spent to reduce a costly risk. It limits your loss.

    You deal with insurance–broadly defined. Backup plans, disaster prep, safety training, HR compliance, financial cushions, and of course, insurance.

    I see value in making this 3-way separation. We may need to bat this around some more.

  3. Charles T. Wilson on said:

    Thanks for your comments and for adding examples and food for thought.

  4. Corri F. DiBagno on said:

    This certainly leads to the adage regarding an “ounce of prevention vs a pound of cure”! When considering “expense cuts” in any safety program, all discussion should involve the risk manager, insurance broker, on-site personnel, etc. Specific cuts for expense purposes can create many unforeseen consequences that can cause significant damage to a company’s operating income/bottom line, move with caution in these areas! Here’s an example: I remember a situation involving a very large welding operation. The insurer’s loss control rep recommended upgraded goggles for this firm’s specialty welders, i.e. guys doing super hot jobs for the military. The owner opted to utilize dated goggles stating they would upgrade as needed. Well on their very first job, they lost two high-end welders due to “eye irritation issues,” i.e. temporary blindness. The owner did not have any other welders to step into the role……time was lost and the company lost several government jobs because of failure to complete on time. Total lost contracts exceeded $2 million, cost to replace all goggles…..about $500!!! Talk about “penney wise…. pound foolish”….yikes!!

  5. Here’s another yogi berra-ism: When money is tight, start saving five years ago! My small business clients who have best handled the recent bad years have long maintained a policy of building up business savings. Their accumulated savings carried them through tough times–kind of like self-insurance. But also provided a fund to invest in growth opportunities.
    Too many businesses, when times are flush, just spend more. Year-end profit? Yikes, we’ll pay big taxes! Time to buy new computers!
    Grass hoppers vs. ants, right? Remember your Aesop? Charles channels our “inner ant.”

  6. John Schaefer on said:

    Good entry Charles. Another important point is that when things are not going great, there is much less cushion to be able to absorb otherwise minor losses. When the water is low in the river you better make sure that you know your way around the rocks and what to do if you are stuck on one. It’s not an easy thing to allocate money toward, and tougher when money is scarce, but it could mean the difference between staying in the river and having to return to shore (or worse).

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