Cost vs investment, knowing the difference

Success at anything doesn’t just happen, it’s not an event but a process. Success is the outcome of implementing well-defined processes that deliver the desired outcomes and results.

One of the biggest challenges facing entrepreneurs and creators is that starting up any new venture is very similar in nature to building a skyscraper. Let me explain that a little. To ensure that you end up with a solid structure that’s capable of providing the required value you need to invest a lot of valuable time, effort and often money up front in order to build the sound platform upon which to start building the real “value delivery asset”.

The challenge for many is that the early investment in time, effort and money often delivers very little or nothing in the way of tangible results and returns, with all the work and progress hidden beneath the surface. This is nearly always the stage where new entrepreneurs start giving up and falling by the wayside.

The problem is this. As people we crave instant gratification, we want to see results for our expended costs and efforts, we are very transactional in this respect. The result of this “instant gratification” mindset is that when we put in work and effort or spend money we expect an instant outcome and result to be delivered so that we may justify and possibly feel better about the cost. It’s imperative that you change how you think about costs vs investments.

The time, money and effort spent early on in your startup should be viewed as the investment it is and not as a cost. The difference between cost and investment is important to understand from a startup perspective as it can materially change your perspective from a mindset of instant gratification to one of long term value creation. Let’s take a look at the difference in mindsets between cost and investment. When you incur a cost (spend money) you automatically want to see and expect a quick direct tangible benefit or return.

I Spend X and I receive Y – A simple transaction of money and or effort for perceived value in return. A straight retail purchase for example. Note: Costs (Consumption) normally depreciate in value over time.

With any investment however the realised benefit and return is a longer-term transaction with value delivered at some point in the future. For example.

I Invest X now and in X days/ Months/ years I will receive a healthy return on my investment in excess of my initial investment. Unlike costs, investments (Creation) are appreciate in value over time.

Whilst a number of different cost and investment models exist I am not going to discuss the different types and merits of each here. I have merely used two simple examples to highlight the differences in mindset from one of low value cost transaction to one of high value investment.

A quick paper exercise can quickly identify which expenses are costs and which are investments. Costs generally depreciate in value over time and provide little or no long term benefit or gain whilst investments deliver long term value, capability and capacity. Being able to quickly identify low value costs that could be removed verses good Investment opportunities is one of the most valuable ways of managing, controlling and maximising limited financial resources.