Resources | Working Capital | June 23, 2023

6 Ways to Prioritize Costs When Growing a Business

There are plenty of places a growing business can invest its resources, from R&D to hiring more staff. But which investments should you prioritize first?

people collaborating around a table and white board

As a small to midsize business owner, you most likely need to make a variety of investments to grow: equipment, technology, inventory, product development, marketing, sales and talent, to name a few. But with limited capital, it can be hard to decide which investments to make. When fluctuating market conditions such as inflation or credit crunches make capital less accessible, prioritizing costs can become even more challenging.

For businesses that choose wisely, the payoff is worthwhile. While prioritization can help maintain a healthy cash flow as your business scales, it also supports a more focused business culture, ensuring that decisions at all levels of the business align with your growth goals.

When it comes to growth investments, there is no one-size-fits-all prescription to follow. Your priorities will depend on your specific business, industry and goals — not to mention external economic factors that are out of your control. Regardless of your position, here’s how to prioritize effectively so you can make the most of your working capital and grow your business.

1. Develop a strategic growth plan

Some businesses grow at a slow and steady pace. If you land a big customer, on the other hand, you might see a sudden increased demand that forces you into rapid growth mode. Regardless of your momentum, the first step in prioritizing costs is to create a strategic plan.

Start by getting buy-in and input from other stakeholders and business leadership. This will help you avoid roadblocks once you get past the planning phase, because there may be undisclosed reasons why certain costs are currently prioritized. It can also illuminate growth opportunities and blockers across all business functions. From there, build a strategy by:

  • Defining the business’s long-term goals. What is its core purpose and which projects align with this vision? This step will make it easier to prioritize expenditures and become a valuable guide when new priorities inevitably emerge or other factors, such as an economic downturn, force you to reevaluate. 
  • Identifying the biggest growth hurdles. For example, a lack of equipment or staff might be your No. 1 barrier to keeping up with customer demand. Alternatively, your marketing and sales strategy could be preventing growth if you’re otherwise meeting demand but need to widen your customer base and increase revenue.
  • Forecasting and planning business finances. Cash flow is crucial to business success. Anticipating your cash position in the weeks, months and years ahead will help you make more proactive growth decisions and meet financial obligations as you make investments. Monitoring your cash conversion cycle (CCC), operating cash flow and cash ratio are valuable for freeing up the cash needed for growth investments.

2. Use the ICE (impact, cost and effort) method

ICE scoring is a prioritization framework that is useful for evaluating business investments. ICE measures:

  • Impact: What short- and long-term impacts will the investment have on your business? This could include improved productivity, customer satisfaction, brand awareness, sales or cost savings.
  • Cost: How much will the investment cost and how long will it take to recoup the investment?
  • Effort: How much effort is required for this investment? For example, an equipment upgrade may necessitate hiring more employees or retraining existing staff.

ICE uses a numerical matrix to assess an investment’s priority. An investment’s impact, cost and effort are each given a value depending on whether they are deemed high or low opportunities. Adding these three numbers provides an ICE score, which gauges the investment opportunity on a scale of 0 (no opportunity, should be dropped) to 4 (extraordinary opportunity, requires immediate action).

infographic explaining the ICE method

For example, imagine that your business is considering investing in equipment that has a high impact (+2), a high cost (+0) and requires minimal effort to implement (+1). This investment results in an ICE score of 3 and should be made as soon as possible.

The ICE method is simple to use and can address biases, helping business leadership make more objective investment decisions. It’s also valuable if you are having trouble isolating a top priority or separating a few key priorities from a long list. 

However, the strategy isn’t foolproof and should be considered in combination with subjective factors. For example, how might an investment impact customer service, whether or not it has a high or low ICE score? If a piece of equipment is needed to meet new customer demands, then it might be worth prioritizing for immediate action even if it has a low score.

3. Find cost-saving opportunities

When it comes to growth, most businesses focus on generating additional revenue rather than reducing costs. However, cost management should be a priority because it can free up capital that would be better spent on smart growth investments. 

Streamlining expenses is also valuable for small to midsize businesses that may have limited access to traditional funding sources such as bank loans, especially during an economic downturn. Cost-saving opportunities could involve:

  • Identifying redundancies and inefficiencies in your business. This might be as simple as switching from checks to digital payment options for your customers. Another option might be to use new technologies that can automate administrative tasks and free up your team’s time and resources.
  • Leasing equipment. If your business relies on expensive equipment, consider leasing opportunities rather than making a large upfront investment — especially if equipment upgrades are lower on your priority list.
  • Contracting employees. If your business is growing at a steady pace, you may encounter expertise gaps but lack the resources to hire full-time employees. Consider where it makes sense to outsource talent versus retain full-time staff.
  • Improving inventory management. If your business stores physical goods, it can be hard to balance fulfilling customer demands with tying up your working capital in excess inventory. This is another area where technology and automation can provide significant cost savings through inventory management software.

4. Monitor competitors’ strategies

Are your competitors launching new products, hiring more employees or changing their marketing strategies? While your investment decisions shouldn’t be based entirely on competitor activities, their actions can have a big impact on your market share and should be considered when you prioritize.

Monitoring competitors effectively involves tracking their sales and marketing strategies, product development and pricing. Quantifying this information and monitoring the data regularly — such as every quarter — will help your business identify trends and adapt its growth investments proactively. This insight can even reveal gaps in your competitors’ strategies, enabling you to make smart investment decisions that put you ahead of the game. Some tips for monitoring your competitors include:

  • Considering the activities of both your direct and indirect competitors.
  • Establishing a competitive monitoring strategy across your teams, from marketing to product development and leadership.
  • Tracking competitor acquisitions, investments, funding, PR and targeted keywords as a starting point.
  • Unpacking the data as an indicator of wider industry trends, not just those of your competitors.

Businesses that effectively prioritize growth investments go a step further than competitive monitoring, closely following broader economic and industry trends. Every industry has unique factors that may affect how you make growth investments — your sector might be impacted by certain economic factors more than others, be subject to government regulations or have a management structure unique from other industries. 

Performing an industry analysis can help you anticipate industry trends and identify specific value propositions or projects that will differentiate your business in the long term. For example, many forward-thinking businesses invest in environmental, social and governance (ESG) initiatives to not only integrate more sustainable business practices but also attract talent, funding and sales. 

Monitoring current events and economic trends also helps inform investment decisions. Understanding external considerations such as supply chain disruptions, inflation and rising interest rates — the factors that your business can’t control — is crucial, especially during uncertain economic times when funding is usually harder and more expensive to secure. 

6. Track return on investment (ROI) carefully

Is your new equipment boosting production to anticipated levels? Did hiring more salespeople help you land your target accounts? Monitoring the return on your investments is crucial for ongoing cost management. If the payoff isn’t panning out as expected, reevaluate your investment strategy for areas of improvement and consider replacing ones that aren’t working. 

In addition to calculating ROI, keep a close eye on your cash flow. This ensures that you have enough capital to keep business operations running smoothly and deliver on your growth plan. Your cash conversion cycle shows how long it takes you to convert investments in inventory and other resources into cash flow from sales, making it useful for spotting cash flow problems. 

For example, if your CCC is increasing after investing in product development and equipment, those investments might not be translating to increased sales. However, if you made the investments to fulfill a customer’s increased demand, a longer CCC could be due to extended payment terms rather than low sales. In this case, strategies such as an early payment program can increase cash flow and allow you to reap the rewards of your investment.

The bottom line

A successfully growing business is one that has a clear sense of its priorities and makes investment decisions accordingly. If you’ve recently landed a big account or your business has enough cash flow to make investments, start by consulting leadership and using prioritization tools such as the ICE method to build a comprehensive growth plan. And if you’re concerned about prioritizing the wrong thing, remember that staying flexible and prepared — namely by monitoring cash flow, ROI and industry activities — is better than not prioritizing anything at all.

Need to free up cash for growth investments? Learn more about how early payment programs can shorten your cash conversion cycle. 

This article originally published September 2017, and was updated June 2023.

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