Overspending strangles businesses slowly over time. As businesses grow the temptation to overspend grows stronger.
Zynga lost 600 million dollars in 5 short years.
The company was riding high on their success. Their games, FarmVille, CityVille and Mafia wars were smash hits with casual gamers on Facebook.
Things were going great, or so it seemed.
But Zynga started to spend.
Every time a new game launched there would be an amazingly lavish party. Each quarter there was another one. Zynga spent hundreds of thousands of dollars on lavish parties and events.
They went on a shopping spree, buying 11 companies in 11 months and began opening satellite offices around the world.
They hired aggressively. They did everything they could to keep their momentum going. Day by day they lost millions of users as people stopped playing their games.
They spent huge amounts of money even as their losses grew.
It's a mistake growing businesses tend to make. Sometimes it's accidental or unintentional, other times it's emotional. But left unchecked, these leaks slowly suck the life out of your business.
What causes these leaks in the first place?
1. Lack of Plans, Vision or Strategy
Google perks are well known. Free gourmet food and snacks, laundry, child care, etc. Some say it's because Google wants to create "golden handcuffs," things that make it difficult for employees to leave. Others say it's because they care about their employee's well-being.
Beware if: Your spending is ego driven, rather than purpose driven. If you're spending money because you think you're supposed to or you're missing a plan, you're in trouble. Spend for your ego and you're in the danger zone.
2. Not Knowing What You Already Have
As companies grow it's common for teams and cliques to develop. Teams develop their own way of doing things and their own set of preferences. But sometimes that leads to silos where each team starts racking up their own set of expenses.
Beware if: You're in the dark about what your company has. If you're paying for products that no one uses, or duplicate products that serve the same purpose, you've got a problem.
3. Not Using What You Already Have
An entrepreneur shared how his company was spending $15,000 per month on perks his employees weren't using. He wasted money on products or services his employees didn't even know were available. By removing these large-scale leaks, he was able to invest an additional 2 million dollars back into his business.
Beware if: Your purchases aren't being used. Maybe no one wants it, maybe no one's aware of it—the reason is not important. That product or service is costing you money. However, if your purchases aren't being used the way you intended, it's important to find out why. Set clear boundaries and expectations on how your purchases should be utilized.
Related Article: Trep Tuesday: 10 Tips to Run a Small Business on a Budget
4. Buying the Wrong Products and Services
Most vendors aren't going to take the time to really understand your business. They're not going to plan for unexpected changes or disasters.
Which means you're likely to get the wrong product.
So, not only is your problem not going to be fixed, you're also going to spend money on a product you don't need.
Beware if: Your provider is pushing a product or service before they understand your business. If you know the results you're looking for, your vendor should be able to break down how their product work, explaining how it will achieve the results you're looking for.
5. You Don't Have the Resources You Need
A customer buys a health insurance plan. They think they're covered but receive the shock of their lives when that major procedure they've signed on for isn't covered. It's a familiar story right?
Beware if: You're buying a product you haven't researched or won't use. This makes you susceptible to being overcharged or manipulated. If you're not sure what you need, or don't have a plan to use what you're buying, it's time to pump the brakes. You'll need clarity and someone that can guide you through the process.
It seems like something bad needs to happen first. How do you catch these leaks before they happen?
Related Whitepaper: How to Afford Business Intelligence on a Small Business Budget
Where Overspending Starts
You need checks and balances in place. When purchasers aren't the end users or, if teams in a similar department or role ask for the same things from different sources you want a way to keep track of things so you don't overspend due to disconnection or a lack of communication.
Mark Pincus, the CEO of Zynga, was asked about his success:
"There's an A-list here, and then there's everyone else, and I'm not A-list."
The desire for prestige—pride, ego, fear—all of these emotions need to be held in check. When they're not, they drive us to make poor decisions in an effort to meet the emotional needs we have. If emotion is running the show, problems will arise.
Your department has an annual budget. If you don't spend all of it, you'll get less next year.
Policies like these encourage wasteful spending, which isn't so bad when you have the money, but it's a death sentence when you don't. These habits, formed in times of plenty, are difficult to break when times are tough.
We Have the Money, Why Worry?
It's easy to act the way Zynga did, to imagine they'd always be on top. When the money's coming in, it's normal to feel this way.
Maybe it's the economy, maybe it's your industry. Maybe it's something else. But change is inevitable. When you're aware of the warning signs, waste is easy to spot.
Waste in inevitable, there's a certain amount of waste that comes with inexperience. But that kind of waste is the exception, not the rule. When we know what to look for, the warning signs are everywhere. At that point, it's more about whether we'll listen or not.
Zynga Ignored the Warning Signs
Their stock price fell from $9.50 to $2. They laid off hundreds of employees and closed offices around the world. They made mistakes but those mistakes were amplified by their spending.
They missed the signs but you don't need to follow in their footsteps by using these tools to spot the warning signs.
Article image via Mashable.