5 Expenses Startups Cannot Afford to Cut
You have probably already absorbed many obvious caveats about setting up your own startup; don’t blow money you don’t have on fancy equipment or splash out on expensive rental space. But what about expenses you’re tempted to cut, but shouldn’t? While not investing in certain areas may seem like a good idea in the short-term, not spending enough on key elements could shortchange your business, leading not only to headaches but requiring expensive fixes down the road.
Here are some areas where it pays to make the necessary investments to get it right the first time:
1. Insurance — Whether it’s a killer software or physical inventory, don’t leave yourself open to a major loss or legal claim with no protection. At a minimum, you should have liability insurance and a commercial property/business policy. The latter would include coverage for assets such as physical inventory and equipment as well as business interruption which pays off if, for example, a fire or flood left your physical location inaccessible for a period of time. Some states also impose requirements for specific types of insurance, depending on the business type. Be sure you know what is required.
2. Accounting and finance support — If you can’t find the time to do it right, when will you find the time to do it over? Paying for an accountant when you’re just starting out may seem like a luxury you can’t afford, but it will more than prove its usefulness. An accountant can help you accurately categorize and set up accounts as well as create an appropriate record-keeping system to enable you to track expenses. This will avoid a frantic hunt for receipts, hours of frustration, and potentially missed deductions or worse, penalties, come tax time.
You’ll also be able to measure your progress versus your budget and financial plan from day one. You will need this granularity not only for successfully managing your business, but also when preparing for funding pitches and during investor due diligence.
Outsourcing can be an extremely cost-effective solution here. Not only will you avoid adding to overhead costs at this early stage, but you’ll save management time — and free yourself to focus on developing your business.
3. Legal expertise — Whether copyright or trademark issues, licensing, negotiating leases or choosing the correct business entity for your startup business, not having a lawyer involved to investigate and explain the fine print and legal ramifications could leave you facing costly litigation or blindsided by an overlooked clause in a contract.
Unless you are a trained lawyer, you are unlikely to have the appropriate level of specialized knowledge on all the issues you will need to address. At a minimum, you should engage a lawyer to draft and/or review every contract you enter into.
4. Marketing — While these days it might seem that there are plenty of “free” ways to grow your business, how will you attract customers and appropriately target your product(s) to the desired client segment, without budgeting for it? This does not mean you need to spend money you don’t have hiring an ad agency or launching an expensive PR campaign. It does mean developing a smart and discrete spending strategy tailored around the best avenues to reach your clients.
For example, if your target market is end consumers, look for guerilla marketing opportunities like sponsoring an event or a slower building viral campaign using YouTube. Analyze your desired segment and see which forms of social media might reach them: maybe it’s sustained Twitter and Facebook campaigns. If you already have a list of targeted customers, don’t overlook email marketing. While fairly low cost, depending on your product it could be a highly effective way to reach prospects.
Lastly, hiring experienced marketing professionals on a contract basis, say to help with building initial brand awareness and/or to create a campaign for Phase A of your product launch, will help keep costs reasonable.
5. Sales — Your sales strategy is a critical element of your business plan and you need to put spending behind it. Do not assume that the software engineer you hired can also double as your business development specialist. While infusing a sales culture throughout the business is non negotiable, it can’t take the place of an experienced sales person/team dedicated to all aspects of growing sales from generating leads, to prospecting, to closing the deal. This person or persons should be closely allied with the marketing effort. You can keep costs low at this stage by making compensation commission-based.
Which startup costs do you think are most necessary? Share them in the comments section below or contact Early Growth Financial Services for strategic financial guidance.
David Ehrenberg is the founder and CEO of Early Growth Financial Services, an outsourced financial services firm that provides small to mid-sized companies with day-to-day accounting, strategic finance, CFO, tax, and valuation services and support. He’s a financial expert and startup mentor, whose passion is helping businesses focus on what they do best. Follow David @EarlyGrowthFS.