That new staff person?
The new software?
Any new investment should give you a good return. And before you make that investment, the path to return should be clear. But at some point, you’re going to have to take a risk and spend the money. This is what separates you from your staff: the willingness to put your money down. Here’s how to test the affordability of your move and mitigate your risk before it costs you real money.
First, make sure the new position can generate at least 2x its cost. This is called “Labor Efficiency Ratio”, and every person in your company should have a clear link to generating revenue. We can break this down separately for management and labor, but 2-2.5x their pay is your target.
For example, if a staff person will cost you $100,000 per year, they should generate $200,000-$250,000 in revenue for the company.
But even if you have a clear understanding of how they’ll drive $250,000 in revenue, it’s unlikely they’ll start earning new business right away. You’ll have to bridge the gap by paying them even as they’re getting started. Test whether you can afford it first:
Open a bank account
Start “paying” the person’s salary+benefits into the bank account every second week (or whenever you pay your staff)
Test for three months to make sure you can afford the position before you hire anyone.
First, make sure the equipment is a cash flow asset: it should increase your revenues without increasing your time spent. As above, your OWN labor efficiency ratio is really important. Don’t buy yourself a lower-paying job!
Then, try to presell space or time on the equipment. If you can cover at least half of the equipment’s cost by pre-selling a service, you’ll have a good indication that it’s a good addition.
For example, if you want to buy a new cryotherapy tank, pre-sell cryotherapy visits or soaks before you begin paying for the machine.
If you’re buying equipment for your gym, run a specialty program that will pay for at least half the purchase price of the new equipment.
Then, before you purchase:
Open a separate bank account
Calculate the loan or lease payment monthly
“Pay” the new bank account the amount of the new asset every month for three months
Did you notice the hit on your cash flow?
Basically, you want to test your long-term purchases before you commit to them. Then ask your mentor how to plan for a return on your investment!