Scrappy bootstrapping entrepreneurs pull off amazing things with very few financial resources. But like all good things, frugality can go too far. It can lead to being “Penny Wise, Pound Foolish.”
This phrase goes back to 1621, when the British pound was a lot of money. Just as in the US, a hundred pennies make up a pound.
What does “Penny Wise, Pound Foolish” mean? There are two interpretations of the phrase:
- Some people are stingy on small money decisions and yet they are wasteful on big money decisions
- Some people make stingy small money decisions that end up costing a lot more than the savings, because of unseen or unintended consequences of their decisions.
I’m going to focus on interpretation number two here. Another way of saying “Penny Wise Pound Foolish” is that sometimes you think you’re saving money when in fact you’re losing money.
The challenge for bootstrapping entrepreneurs is to know when saving money is actually a bad financial decision. It’s a challenge because so often saving money seems like the right thing to do!
Bootstrap Entrepreneurs Are Penny Wise
When you don’t have lots of spare cash, cutting costs is a necessary habit.
You work at home instead of renting an office. You travel economy. You attend free networking events.
You scour the web for discounts, tag sales for cheap furniture, Craigslist for needed bargains. You haggle over prices whenever possible.
You do it yourself (DIY) instead of paying others to “do it” – business card design, incorporation, bookkeeping, marketing, the list goes on.
Balancing Frugality With Efficiency And Effectiveness
Like with most things, there are important tradeoffs when you’re a relentlessly frugal entrepreneur.
- Trading your time for money. Cheaper options very often consume more of your precious time. Sometimes your time could generate more cash if it was spent elsewhere.
- Trading employee time for money. For example, skimping on productivity tools can backfire.
- Trading short term versus long term expenses. When meeting payroll next week is always urgent, potential costs next year or even next month can be overlooked.
- Trading costs for effectiveness. Even with unlimited time, when you DIY there is a tradeoff in effectiveness in marketing, legal, accounting and other areas.
- Trading product and operating costs versus customer satisfaction. It’s a never ending struggle to deliver what customers need without breaking the bank, and it’s easy to forget the long term value of customer relationships.
- Trading one kind of cost with another, maybe less obvious cost. It’s human nature to focus on what’s in front of us, harder to step back and look at the bigger picture. And it’s also important to remember that marketing tricks are used all the time to make people think they’re getting a bargain when actually they aren’t.
- Trading off just a little more savings through haggling or negotiation with the risk of losing a good deal altogether.
How To Avoid Penny Wise Pound Foolish Boostrapping
Let’s start with a huge issue for many entrepreneurs: you don’t value your time when thinking about your business. So many business owners I’ve spoken with don’t include their own labor in figuring out the cost of goods sold, for example.
But you know your time is not infinite. And if you think about it for a moment, you know that some of the things you’re doing are much more valuable than other things. Here are some suggestions on how to avoid being penny wise pound foolish with your time.
- Hire an office manager as soon as possible. The less you are scheduling meetings, booking travel, buying office supplies, keeping things clean, and otherwise handling day to day administration issues, the more time you have to generate revenue and build the company.
- Outsource bookkeeping as soon as possible. Sometimes an office manager can also do bookkeeping but a bad bookkeeper can lead to financial disasters. I’ve seen it twice in my career.
- Use free versions of productivity tools like Gmail, Evernote and Canva, but don’t shy away from spending a bit of money if the paid version will save you lots of time.
- And for goodness sakes buy an accounting package. The time you save and the headaches you’ll avoid are well worth it.
As your business grows and you hire employees, you’ll want to build a scrappy culture to start. But when you’re no longer stressing about meeting each payroll it’s time to think like an investor and put a bit of money into high value employees.
- Don’t buy or keep old cheap and slow computing systems that cost employees hours of time and a loss of morale.
- Great coffee machines and select other perks end up as high ROI.
- Always think about how additional people, tools or processes can make your most valuable employees more productive. Small investments can yield big long term!
Humans tend to overvalue short term benefits over future benefits. This can lead to poor decisions in many contexts, including by bootstrapping entrepreneurs.
- Stop mixing your personal and business expenses just to avoid the cost of a second bank account. The time and trouble of keeping them separate isn’t worth it.
- Make sure employees aren’t categorized as independent contractors just to avoid the extra taxes. The IRS doesn’t like that one bit and they will be very expensive to deal with when they catch you.
- While store credit cards can save you 15% on an initial purchase, if you don’t pay it off quickly, the accumulated interest will wipe out the short term savings.
- Don’t try to scrimp on the hundreds of dollars a tax accountant costs if there’s a risk that you’ll end up owing thousands more in taxes and penalties.
- Similarly it’s usually cost-effective to get professional advice upfront for many critical issues. The right lawyer, logo designer, marketing professional, and human resource specialist (when you start hiring) will pay back their fees many-fold in the long term. The challenge of course is figuring out who is “right” for your business!
- Lots of things need regular maintenance – your equipment, your office, your body! Scrimping on maintenance in the short term very often is being Penny Wise Pound Foolish.
- Make sure you get appropriate insurance coverage, as the risks of long term disasters are almost never worth taking.
- When you find what seems like a great deal, don’t forget the other things that might drive up your overall costs such as shipping and handling, driving to get what you bought (gas, vehicle wear and tear), your time to make the thing usable by cleaning, maintaining or storing it.
- Buying in bulk can save on the initial purchase, but may have hidden costs in terms of storage, insurance, and financing if you don’t have the cash on hand.
- Education and training are short term expenses that often have a very large long term return. Especially as cash flow crises subside, make sure you don’t be a cheapskate now, and wish later you and your employees knew how to handle future challenges.
We’ll finish by linking to one of our favorite venture capitalist bloggers, Mark Suster. He wrote a great post about his own path from being a big company overspender, to being a startup overspender, then a born-again penny pincher entrepreneur, and finally now seeing the need for balance.
Have you made any decisions that were penny wise pound foolish with hindsight?