March 14, 2013 | 5-minute read (942 words)
Legal fees, operations, facilities. Marketing, professional services, project creep. Cost of goods, insurance, advertising. There are just so many little ways that a startup can overspend. That’s why it’s so important for startups to be so vigilant about their financial planning and keep such a close eye on expenses.
If you’re looking for a “hack” to significantly lower your expenses and reduce your cash burn, I recommend shining a light on these three specific areas: vendor relationships, staffing, T&E. Focusing on your spend and reducing costs in these three areas will have a huge impact on your startup finances.
Here’s what to look out for, and practical, actionable tips for cutting costs in these areas:
1. Vendor relationships. You need to actively manage vendor relationships to ensure that you aren’t overspending in this area. Vendor relationships are an area where inertia can really strike.I see many small businesses who are reluctant to seek out new vendors (or other suppliers) because of the hard work that needs to go into researching, comparing, and finding new options. Also, it can be very disruptive to switch vendors.
But, as a startup, you need to be prepared to shake things up a bit for the good of your company (and your bottom line). Keep a close eye on costs and services to be sure that the contract matches the services that you receive. Beware of auto-renewing as that sometimes serves as an excuse not to annually re-evalute your contract and it can impede your ability to re-negotiate better prices.
If you really want to stick with your current vendor, do your research on other vendors and then share their RFP with your existing vendor who will likely be willing to work with you to keep your business. That said, I wouldn’t recommend only selecting and sticking with vendors based on cost (after all, you get what you pay for...), but it is an important factor to consider and actively manage.
2. Staffing. HR is the greatest expense for many small businesses. From recruiting to managing personnel issues, from compensation to benefits, from payroll to employee policies and procedures, HR and HR-associated costs can go through the roof. HR costs are unavoidable to some degree, but there are many ways to effectively manage and minimize these expenses.
One way to manage costs is to refrain from hiring and expanding too quickly. With each new employee you take on, there are associated costs that you may not be ready for just yet. A better choice is to outsource non-core competencies. Literally outsource as much as you can, wherever you can. You know you can outsource technical and content development, but there are so many other kinds of functions you can outsource. You can outsource day-to-day transactional accounting functions, like payroll, accounts receivable/accounts payable, cash management, financial statements, and taxes. You can even outsource strategic functions such as strategic financial management.
Contact Early Growth Financial Services for information about outsourcing your accounting and finance.
If hiring in-house for certain positions makes more sense, beware of exorbitant recruiter fees—especially in tech. You can somewhat mitigate the cost. Start by creating a realistic staffing plan that aligns with your development and growth plans. Then work closely with your internal HR department, if you have one, or, more likely, with an outsourced HR function to clarify your desired process for recruiting and on-boarding.
Depending on your company, it may also make good sense for you to have an ongoing interviewing process, whereby you are always recruiting, considering, and interviewing potential candidates—thus giving you a pool of talent to pull from when the need arises. Also, never underestimate the power of the referral bonus—win/win for you and your team.
T&E. When you are doing business development for your startup, there are often a lot of related T&E expenses. Unfortunately, T&E has a tendency to spiral a bit out of control. Travel and related costs can certainly be expensive—and that is a justifiable expense for growing your business—but there is often a lot of overspending, and waste, in this area.
Fortunately, with the right tools, T&E can be kept under control. There are expense management solutions for larger companies, but these are too expensive and involved to offer great benefit to smaller businesses. Instead, I recommend implementing a simple solution and process for recording and tracking T&E. A low-cost solution that provides you with the ability to set controls and run reports can go a long way towards controlling costs.
Many entrepreneurs, particularly first-timers, overspend. It’s a fact. Unfortunately, critical overspending can lead to startup death—a slow bleed of capital until there is nothing left. To avoid an untimely demise, you need to stay on top of your finances and practice real discipline in making the sometimes hard decisions necessary to maintain control over your cash, and over your business.
Where do you think your startup may be overspending? Let us know in comments below or contact Early Growth Financial Services for help reducing your spend and managing your finances.
David Ehrenberg is the founder and CEO of Early Growth Financial Services, a financial services firm providing a complete suite of financial and accounting services to companies at every stage of the development process. He's a financial expert and startup mentor, whose passion is helping businesses focus on what they do best. Follow David @EarlyGrowthFS.