Being a frugal business owner in 2021

“So much for industry, my friends, and attention to one’s own business; but to these, we must add frugality if we would make our industry more certainly successful” these were the wise words of Benjamin Franklin in his essay The Way to Wealth of 1758. 

Frugal individuals are, quite often, described with a supposed interchangeable term: cheap. Meaning, most people equate frugal individuals with cheap ones. However, frugality is subjective. Likewise, entrepreneurial frugality corresponds to an average entrepreneur possessing the tendency to conserve pre-owned resources and put forth increased mental effort in making sure that newly acquired resources are of the best value. The frugality rhetoric emphasizes short-term sacrifice and immense hard work as a means for future success. 

When Mark Zuckerberg became one of the most successful tech moguls, he could have spent his billions on expensive housing or getting married to his wife Chan anywhere else more lavish than the backyard of their $7 million Palo Alto home. Moreover, according to a story in the Wall Street Journal, Zuckerberg drives a Volkswagon which he bought by traded his $30,000 Acura. 

Rather than spending his swelling fortune, he funnels it back into his company at the cost of upgrading his lifestyle. To an average Joe, it’ll sound like madness, but researchers Thomas Stanley and William Danko couldn’t have agreed more: “Frugality is the cornerstone of building wealth.” In “The Millionaire Next Door,” Danko and Stanley highlighted that the wealthiest of Americans drove averagely-priced cars, spent way below their means and bought housing in average neighbourhoods. 

Lifestyle of a Frugal Entrepreneur

The colonisation era shaped the meaning of frugality drastically. For years to come, it was closely associated with survival in hostile conditions and destitute environments. During American colonisation, “settlers on the frontier needed to grow most of their food, make most of their clothing, and build their own houses and furniture” with “tools and other useful objects had to be repaired and reused as long as possible”. This is to say that the concept of frugality has persisted over time. It has been actively encouraged to minimize consumption while increasing wealth. Thus, making entrepreneurial frugality a key strategy in today’s corporate world. Entrepreneurs who have the relevant skills to navigate their cash flows, limit and consistently reduce superfluous expenses, with adequate skills in establishing their business in a resource-poor environment are more likely to thrive. 

These are some of the fiscally responsible lifestyle choices of a frugal entrepreneur: 

• Modest housing: when you have millions at your disposal, being frugal can prove to be difficult. Popular culture is big on glossy vanity magazines featuring images of posh people wearing expensive clothes, with their luxurious cars and their opulent homes. The media makes it utterly difficult to accept humility and modesty if one wishes to stay relevant. However, Warren Buffet strategically chose frugality over extravagance. Thomas Stanley explains, “Many people who live in expensive homes and drive luxury cars do not have much wealth. Then, we discovered something even odder: Many people who have a great deal of wealth do not even live in upscale neighbourhoods.” Despite the net worth of $108.9 billion, the CEO of Berkshire Hataway who made his name as a value investor has adopted a humble lifestyle. In 1958, he bought housing in Omaha for merely $31,500 and has resided there ever since. It is a cosy 5 bedroom house. This lifestyle allowed Buffet to resist the urge to impress others and focus on wealth-building instead. 
• Avoiding unnecessary expenses: Impulsive buying is generally associated with wealthy successful entrepreneurs. But, the reality is much different. Long-term success and wealth-building are closely linked with tracking every gain and expense. John Caudwell understands that strong financial principles rule. He built his cellphone empire from scratch, retired after, owns a helicopter, a yacht but spending away his fluctuating wealth on everyday pleasure is not his style. He is very meticulous about his expenses in everyday life. A net worth of $3.1 billion but he cuts his hair, purchases his clothing off the rack at Marks and Spencer and bikes 40 miles every week instead of having someone drive him. Living life below your means is important. Hence, being a stickler for savings comes in handy. Like Warren Buffet would advise, “I think the biggest mistake is not learning the habits of saving properly early, because saving is a habit.”
• Make valuable investments and avoid risky ones: Being able to invest wisely is a true skill. Your wealth will only plummet if you have no means of growing it. Entrepreneurs stay up-to-date on finances, the stock market and educate themselves on smart business decisions. If you do not know how to appropriately analyse an investment, you might end up suffering a big loss. With the right knowledge and expertise, you can thrive as a frugal entrepreneur. Bernard Arnault knows all about which investments work and which ones don’t. He is a French investor, businessman, and CEO of a leading luxury brand: LVMH. It is a global leader and one-stop for high-end merchandise. He made quite an investment with Albert Frere, the richest man in Belgium, and iterates, “I’ve always been pleased with the investments I’ve made with my friend Albert Frere, and I regret not having followed him more, because I would have been a lot richer.” Since it is difficult to have the same networks as Bernard Arnault, there are numerous wealth management and planning options that entrepreneurs with high-net-worth can make use of. 

Why Frugality Matters? 

Well, to begin with, there is a reason why the richest people are the most successful entrepreneurs. Brad Klontz, a CPF professional and an associate professor of financial planning at Kansas State University, holds that the rich tend to be “money vigilant”. 

For a business, frugality ensures an effective system of cost control. This holds for businesses of any size. Impulsive spending and investment decisions can mean losing a huge chunk of your market share to your cost-effective competitor. But frugality is a core principle for Jeff Bezos and his business: Amazon. In its initial phase, Bezos had to run his online bookseller business from his parents’ life savings. Since this money was limited, he had to be frugal. When Amazon’s then-few employees needed desks, Bezos DIYed them together with a door to save costs. 

Even after it successfully took off, Amazon continues to endorse frugality. The company has been deliberate about maintaining a cost-conscious culture. Bezos understands that frugality fosters innovation. He used it as a forcing mechanism since “One of the only ways to get out of a tight box is to invent your way out.”

But Amazon is a gigantic marketplace. Can frugality be just as effective for businesses of all sizes? Here are a few advantages entrepreneurial frugality can bring for your business: 

• Competitive market pricing: Unless you are a part of an oil cartel, your business will be faced competition. Having a cost advantage over your competitors can change the ball game for you. However, only businesses that have a firm grip on their expenses are in a position to price their products at a lower rate and eventually make a profit. Being frugal can allow your business to cut down on production costs and gain an edge over the competitors. The market mechanism only favours the fittest and to remain in businesses, firms and companies need to be efficient and offer competitive prices. 
• Better profit margins: Being frugal about your expenditure can lead to greater profit margins. If you can save tremendously on your expenses, and work with similar prices to that of your competitors, you can expect a higher profit margin.
• Interest expense saved: Entrepreneurs that can cut costs and spend frugally make smart financial decisions and reinvest the saved money back into the business. This allows businesses to avoid debts. But if your business does require additional financing for expansion or to introduce a new product, your frugality will help you make the right decision instead of seeking hefty interest loans that burden your business. 

Go Big or Go Home

This year has been merciless. With global recession approaching and a dangerous pandemic making it more difficult to stay in business, innovation can be the key to survival. This is exactly the situation Bezos had been talking about when he said “tight box” and the only way out is through. In such a resource-poor environment, making the most use of capital, labour and your product can allow you to have a swift ride into the new normal. Some organisations have had to alter their entire model to be cost-effective. There is no proven method to being an effective frugal entrepreneur. Hence, it is crucial to have a plan. There is the business owner that commences their frugality journey by analysing their model. Going completely paperless can be an effective strategy. Storing information, documents, contracts, among other paper-based processes can be replaced with a tablet. It saves money over time and the environment. 

Simultaneously, if you do require more help, outsource. Especially for newbie entrepreneurs, the enterprise can be a problem but dedicated professionals can help understand how your business can start being frugal. This is a better option than hiring an employee. When you outsource work instead, you can pay per task or hour. This way, you can maximise work done and receive the help that you require without having to hire a full-time employee. 

Finally, it is your turn to become a frugal entrepreneur. You might have to change the way you look at yourself, your business, your employees and your customers. Frugality is able being efficient with how you utilise your resources and maximise the output to reduce costs.

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