In our book, The Entrepreneurial Investor, my colleagues and I say that an entrepreneurial investor always asks, “How does this company make money, and how does it make money for me?”

Growing your business – or your personal wealth – requires some simple but difficult decisions about how to spend money. In effect, you have to look at every expense and ask, “Does this make me money or cost me money?” 

At Kinko’s, I found it helpful to compare every proposed expenditure to our well-known profit generators.  Here’s a hypothetical example: a manager might request new cabinets, but custom furniture is expensive, so I would ask, “Would you rather have new cabinets to look at, or 10,000 cases of paper you can sell for a 90% margin?”  The manager, who was on a profit-sharing compensation program, usually made the cabinets last a little longer.  When we really needed them, we invested in cabinets. Until then, we invested in cash flow and profit generation.

Business must be conducted in a businesslike manner, and a young business should only spend money to make money. Even when Kinko’s became successful, we kept the customer areas of the stores as spacious and comfortable as possible, while the back offices were usually cramped and stocked with second-hand furniture. We didn’t have to require this; our profit sharing program made frugality a point of pride.  The manager of our downtown Seattle store had the nastiest looking chair I’ve ever seen. But have you ever noticed how bankrupt companies are always selling really fancy chairs at their liquidation auctions?

Sometimes managers and partners took frugality too far, because you cannot always quantify the return on amenities and atmosphere, but on the whole I think it’s healthy to question each and every expense, every month.

Remember that book, The Millionaire Next Door? The authors showed that many Americans achieve financial independence through simple frugality. They are plumbers and carpenters and roofers. They own their own businesses, watch their pennies, and amass small fortunes. They don’t always make a lot of money, but they save a lot of money, and they spend their money wisely.

I harp on this topic all the time, because too many people treat money cavalierly. Our financial choices limit or expand the other choices available to us: where to live, how to work, when to retire. Unfortunately, easy credit has lulled many Americans into a false sense of economic security, and fallout from our current economic crisis will force some tough adjustments on people who never developed the habit of frugality.

Money wasted is opportunity lost, and a lost opportunity may never come again. In personal or business finance, you always have to ask yourself, “Is there a better place for my money? Is there a better use for my money?” Your money can work much harder than you can, but only if you give it the job and supervise it well.