You don’t need to think too hard to consider the most obvious effects of overspending on your business. However, there’s more to it than blowing the budget and not having the capital you need to meet various obligations.
Besides putting your business at risk, overspending can affect your leadership in various ways.
The worse-case scenario is that spending too much and incurring too much debt can run your company into the ground. Even if the situation doesn’t deteriorate to that point, it could lead to lacklustre profits and sluggish growth, and it could undermine your authority.
Poor Leadership Diminishes Value
One thing a good leader aims to do is to steer a business toward sustainable maximum profits and minimal expenses.
Part of that means trying to limit or eliminate overspending, which eats into profit. There’s a direct correlation between good and even excellent leadership, profits, and value.
In an article for Forbes, Jack Zenger, CEO of a strengths-based leadership development firm, described his and colleague Joe Folkman’s research into the role of leadership in profit creation. According to Zenger, their findings support the premise that leaders influence their organizations’ bottom lines.
The duo analysed a database of approximately 500,000 feedback reports on approximately 50,000 managers, and their findings were nothing less than dramatic. The Fortune 500 commercial bank-commissioned report revealed total net income of $1.2M in losses for the bottom 10% of those managers, $2.4M for the middle 80%, and almost $4.5M in gains for the top 10% of leaders.
Summarising their findings, Zenger wrote that good leaders added greater economic value than poor leaders, while extraordinary leaders added much greater value than good ones.
Read more: Realising The Market Value Of Leadership
Overspending and Insufficient Planning
Overspending can be a sign of a lack of planning that goes beyond the monthly, quarterly, or yearly budget.
If your business regularly overspends, examine the financial and business plans, compare them with the actual spend, and try to identify the discrepancies. Going forward, you might want to start using an expense tracker, to help you with the process.
If the overspending is due to insufficient planning, the lack of a plan for the year could lead to you doing things at a whim. It could also lead to your employees taking advantage of the situation or not being able to fulfil their tasks properly.
The result is a loss of real control over your business.
In an article for YouInc.com, Scotiabank small business expert Roger Pierce wrote that you cannot organise your team, strategies, or resources without a business plan. A plan can help you map administration, finance, human resources, operations, and marketing activities, which in turn can lead to realising various goals on a tight budget. In the absence of such a document and the controls it offers, you and your employees could make expensive decisions that are detrimental to your business objectives.
If you exceed your budget and don’t have additional cash flow or resources, your business may become heavily indebted, you may need to lay off employees, reduce operations, or close your doors all together. Even if this is not the case, poor money management reflects badly on leaders as it shows a lack of planning. This leads to a lack of confidence and may cause employees to undermine you, or simply ignore future instructions that relate to cost savings or planning protocols.
This may interest you: Creating an Action Plan for Your Life
Vendors And Value for Your Business
According to Pierce, failure to conduct vendor reviews could lead to your business overspending. This could be the case, especially if vendors are charging you rates for materials, products, or services that are higher than competitive market rates.
Regular vendor reviews are an important part of ensuring that you’re not paying too much for the equipment or products that you need to run your business. You need to look out for red flags like increased prices, a decrease in quality, or any potential overcharging. Regular reviews allow you to monitor vendors closely and not simply assume that they are delivering what you are paying for.
Not conducting vendor reviews demonstrates a lack of leadership that can result in your business not receiving the best value for money, and in vendors actively taking advantage of the lack of oversight. For example, a vendor may notice that you continue to purchase from them even if they consistently increase their prices or have shortfalls in delivery. If you don’t put a stop to this, they’ll continue to do so for as long as they can get away with the behaviour.
Wrong Vendors Can Undermine Competence
Hiring the wrong vendors for a job often results in overspending on that job due to their incompetence, inefficiency, or lack of experience.
Pierce wrote that hiring wrong fit vendors often happens because a manager may be too busy to find the best supplier for the job.
Instead of investigating industry leaders and asking them for quotes, you might turn to an existing vendor that might agree to do the job because it means more income for them. Some vendors might agree even if they aren’t qualified to offer that service.
Apart from this resulting in costly mistakes and fixer-up jobs, it can undermine your own sense of competence, as well as your employees’ estimation of your competence. This will damage your reputation and cast a poor light on your leadership skills. As a leader, you need to appear 100% competent at all times. If you appear incompetent, employees will lose their trust in you.
Overspending And Unprofitable Marketing
Writing for Inc.com, Fortune Cooking Advertising CEO Shawn Porat explained that advertising is one of the areas in which it’s easy for a business to spend too much money. It’s an even greater problem when that money is being invested in advertising that offers poor returns—and if this happens regularly, it can undermine you as the leader. Consistent poor returns show that you haven’t done your research and employees will notice that you’re spending huge sums of money with no results to show for it. This dents their confidence in your leadership skills and may lead to resentment as they’ll feel the money wasted on advertising would have been better off invested in their development or remuneration.
Porat recommended that you define specific goals before you do any advertising, and then find the best type of advertising to achieve those goals. Conducting extensive market research and determining what ROI you’d accept as a success is a good goal to start with. This requires long-term planning, which means a budget that is sufficient and controlled tightly, as it may be some time before you see returns on those campaigns.
He added that you should track and test the advertising you do, which can help you assess the effectiveness of your campaigns. If you don’t track and test advertising campaigns, you’ll have no concrete data that you can analyse to see where you’re reaching your targets, and where you’re falling short.
In doing this, you’ll increase your potential for success and highlight why you are a good leader. Good leaders breed success, and positive returns on marketing mean that bottom lines improve, and employees reap the benefits, either through bonuses, salary increases or other workplace improvements.
No Analytics and Poor Decisions
On the subject of tracking and testing, overspending may indicate a lack of analytics, whether that comes down to a shortage of data, a lack of experts to analyse data, or the omission of reporting tools. Without a clear knowledge of the analytics behind your marketing strategies, it’s impossible to make educated decisions about the way forward.
In today's world, there’s no excuse not to have data at your fingertips. There are so many available resources to analyse, from social media metrics to the results of paid surveys and online reviews.
By analysing the feedback you receive and the decisions that you make, you can identify what works and what doesn’t. Sometimes, you’ll see that a certain demographic isn’t drawn to your product because of its packaging. For example, Gen Xers focus heavily on corporate social responsibility and are more likely to purchase products in recyclable packaging. If your product isn’t resonating with this target market, you may need to reconsider your packaging if this has become a sticking point.
In a nutshell, analysing feedback allows you to focus on what generates profits and avoid what is detrimental to the business. Reliable analytics can lead to better decisions and more controlled spending. Leaders should always make educated decisions based on fact. Those in leadership positions who fail to do so set a poor example. Employees start to think that there’s no logical drive or structure behind the work they’re doing and lose motivation. This leads to poor performance, which in turn reflects badly on the leader.
Read more: Leveraging Data And Analytics To Make Purposeful Decisions
Purchasing Unnecessary Products
Purchasing unnecessary products and services was another spending mistake that Porat identified in his article.
Apart from the financial expense that you can incur by spending more than is necessary on products that your business doesn’t actually need, another cost on your business is the time that it might take for you and your employees to learn and use those products, technologies, or services.
Investing in complex, sophisticated software systems that a small business doesn’t need is one way that leaders can fall prey to this mistake.
Not only will the software be costly, but the time that employees spend learning how to use it is a drain on resources, especially if the system over-complicates tasks that were previously simple to execute.
As a leader, you need to ensure that any products you invest in benefit your employees and streamline their jobs. In doing the opposite, employees will lose trust in you and may call your decision-making skills into question. They’ll also become disgruntled if their job has suddenly become far more difficult and you’re the root cause.
Avoid Jeopardising Your Credibility
Overspending in areas of business that directly impact performance, productivity, and bottom lines is a sure way to jeopardise your credibility as a leader. Not just within your business and among vendors and industry peers, but with other stakeholders, too.
Use the information in this article to cut down on spending too much and to take decisive steps to enhance your leadership of your organization. Great leaders add value, plan ahead, focus on utilizing data to make good decisions and always go the extra mile to ensure their employees have the right tools for the job. They inspire confidence, are trustworthy and transparent, and have a firm grip on how to make decisions that benefit the business and all who work there.
Read more: How To Finesse Your Leadership Skills
Be sure to check out this insightful media on how to prevent overspending, which you can espouse in your daily life: