One of the responsibilities of running a business is taking good decisions – not just when facing a crisis, but ensuring, as you make your plans that they are based in a pragmatic understanding of reality. Falling victim to fallacies in your thinking, from unfounded optimism to rampant egotism can lead to terrible results, not just for you, but for the people working for you.
Today we’re looking at one of the fallacies of decision making that can do real harm to your business – the false economy.
It is, of course, important, to run your business efficiently and not spend more money than you need to. Unfortunately, this drive to save money, look for savings and be cost effective can lead you to make poor financial decisions that lead to poor outcomes.
What is a False Economy?
To get at why these decisions are so harmful, we have to really understand the phrase. What does ‘false economy’ mean?
If an economy is a cost saving measure, a ‘false economy’ is a decision that looks like it will save you money in the short term but reveals in the long term that it has cost you far more. In the home, for example, you might skip insurance on your boiler and think you’re saving every month, only to end up paying much more in the longer term when it breaks down and you’re hit with a big bill.
In the business world, false economies might look like going without legal advice from a solicitor, or failing to do international research when planning to open up in a new market. Both involve dealing with potentially costly experts, but skipping on these services could lead to much more substantial costs down the line.
Avoiding False Economies
To avoid these poor decisions you need to build the notion of risk and cost into your decision making process. You may not have the resources to support someone dedicated to assessing risk for your business, but you can certainly take on that role yourself, at least for your biggest decisions.
One of the things you need to be wary of is that cost isn’t always in the same currency as the money you appear to be saving: if you save money by cutting resources to your customer service department, for example, you might see an immediate drop in revenue – but it will slowly undermine your reputation and lead to a drop off in sales over time as your customers perceive that they simply aren’t getting the same level of service!
A financial saving that causes a hit to your reputation is simply a cost that you don’t see until a weeks or months have passed.