7 rules for keeping startup costs in order13 December 2015 Category:
Note: This article also appeared in Entrepreneur Middle East, and can be viewed on the site here.
It almost goes without saying that one of the most critical tasks for any startup is to calculate just how much your new venture is going to cost. Not only will knowing your numbers inside out help you plan for exactly how and when you are going to be able to get your startup off the ground, but it will also give you a far better chance of success in the long-run.
According to research from the venture capital database CB Insights, who surveyed over 150 failed startups for the study, the number two reason for failure was simply running out of cash. Their survey showed that a third of startups cited “spending too much money” as a close second on the list of reasons for why they failed (the number one reason given was an unresponsive market).
Now of course the amount of money you need is going to depend on the type of business you are launching, but whether your startup is likely to require $1,000, $100,000, or several million, the simple rule of thumb is that you want to always keep costs to an absolute minimum. Try not to take on a penny more of fixed costs than you need, and have simple measures in place that will allow you to quickly scrutinise every last purchase to identify if it is necessary or not.
According to research into failed startups, the number two reason for failure was simply running out of cash
Let’s now take a look at seven key things startups can do to improve their chances of not only a successful launch, but also long-term success. (And of course the advice applies to businesses of any age, really.)
1. Get your priorities in order: With an ever-growing to-do list and 101 tasks on the go at once, prioritising exactly what you need to pay for is easily overlooked. So get started with a list of every potential expense: licensing fees, premises, office supplies, computer equipment and so on – essentially any outgoing you envisage during and beyond start up. Now, go back down the list and ask yourself the following: Do I need this now? And if so, what is the cheapest way to get it? Maybe you can start from a home office instead of renting one, for example. Or instead of purchasing equipment new you can buy second hand or even rent. Again, the attitude should be this: Regardless of whether money seems tight or not, the only expenses that should ever get on your list are those that are absolutely vital to launching your business.
2. Don’t forget the little things: It may be relatively easy to get a handle on your larger expenses such as premises or even staffing costs, but don’t forget the little things – those recurring expenses that’ll soon eat through your budget if you’ve taken them lightly. I’m talking about costs such as office supplies, internet fees, web-hosting, maintenance, and any other recurring and potentially variable cost that can be so easily overlooked. The key here is to include a buffer in your initial calculations for any miscellaneous costs. That way you can cover any shortfall and you’ll not be wondering why your balance doesn’t look quite how it should each month.
3. Start bringing money in as soon as you can: There is a belief among many entrepreneurs that if you are building a great product or service, then it is best to finish it first and monetise it later. While there is some merit to that approach, the fact is that with everything going out and nothing at all coming in – you’re on borrowed time right from the start. Of course you may not be able to launch the finished article straight away, but if you can get something to market now, then do it. It is much better to work on a minimum viable product and get a revenue stream in place early – providing it is not going to negatively impact your long-term aspirations – which you can then build up over time. And remember: Product evolution has no end, so starting earlier than planned does not mean settling for less.
4. Be ready to barter: An incredibly straightforward way to keep your costs in check is to trade off your services with other likeminded businesses or entrepreneurs. Are you able to swap marketing services in exchange for accounting services, for example? Perhaps you could even partner with another entrepreneur and compensate them with client referrals for any services you do not provide. Write up an inventory of products and services that you would be willing to trade-off and what you think they are worth. Not only can this save you money, but you’ll most likely build up some great contacts along the way – some of which may become long-term paying customers.
5. Learn that it’s ok to bring less to market: This one is somewhat similar to point 3 above, but particularly suited to service companies. You’ve been thinking about a business idea for several years, and so it’s natural that you have grown it to a massive size in your head. You want to launch all services at once – or launch nothing at all. But that is the wrong approach. Not only will this lead to delays, but it could possibly even prevent you from getting out of the box altogether. Ask yourself what you are best at and what you are ready to take to market now, and just get going. If you can’t afford to launch the events arm of your marketing agency straight away, then start without it. In fact, being a services firm has great advantages when it comes to cash flow, because you can effectively start generating income with those very first jobs you get, and much of the time no upfront investment is required. Compare that to a web platform or a software that you have to first build, test, take live, and then get those first paying customers. That can take years with zero income in the meantime. So embrace the flexibility of services and use it to your cash flow advantage.
6. Make sure you get paid: With so much focus on finding new clients, it’s really not uncommon for entrepreneurs to put payment collection on the back-burner. No, you don’t have to send burly bill collectors out to visit your clients, and you don’t want to demand payment too quickly. But communicating fair terms and then following up accordingly will help you ensure a healthier cash flow. For example, if you send all your bills out on the last day of each month and request on your invoices that payment should be made no later than 30 days from the date of invoice, you can – if you have not yet received payment – politely inquire around the 30-day mark to see what the status is. The point is you do need a system in place for managing your books and cash flow in particular, and until you are big enough to have a department that manages this within your company, you need an organised system that is tightly managed by none other than you.
7. Remove emotion from all financial decisions: As I touched on at the outset, whether you are making lots of money or just a little, your attitude towards finances should not change. It’s rather easy to get excited and perhaps a bit too generous with the money once you start actually making it. But don’t. Remove all emotion from your financial decisions. Every single decision should be based on whether that purchase will save you money or make you money. Whether that is a new hire, a new copy machine, a new financial software system, a broader marketing investment, etc., your approach to the way you make your decision remains the same as it always did. It’s ok to have fun every once in a while. Treat your team to company excursions to show them how much you appreciate their service, or splurge on that holiday party. That is all fine, and that is, in fact, all towards the growth of your company as well.
Develop a reputation for being frugal
We can never be too careful with corporate spend, and so on a final note I will remind you to develop a thick skin when it comes to finances, and not worry at all about being seen as a frugal spender. In fact, embrace it. Let people know that if they want your money they have to wrestle it from you – meaning they have to make a very strong case for requesting it. Once you set those ground rules, you will notice that they won’t come knocking nearly as much.
And if you have to, remind yourself and others that it is all for the greater good. If you take care of the company, you take care of those involved in it. With the right financial mindset backed up by an organised system, you will better be able to focus on the things that matter most. There will be more money for product development, more money for marketing, and more money to pay the right people what they deserve.