Setting up a business is exciting, but it can also be extremely nerve-racking. As a new business owner, you will feel the need to have the latest software, an impressive office, and an efficient workforce. You will also feel the need to invest heavily in marketing.
Oftentimes, new business owners fail to see the big picture. Usually, the businesses that do not survive in the long run are the ones that were set up by people who spent extravagantly.
We will cover various ways through which a startup can waste money, resources, and time. At the same time, we will cover the correct ways for getting spending discipline to address these challenges. By doing so, we hope to improve the odds of a new business’s survival.
Cash is essential for a newly established business. Unlike an established business, a new business has unpredictable and slow-generating cash flow. A business can easily run out of cash if funds are spent on inappropriate expenses. Funds should be spent based on the company’s cash flow needs.
Expenses and changes should be appropriately timed. A new business should be appropriately staffed and should have enough physical space to function. Tools should also be appropriately provided.
New changes should be appropriately made to a company. If a new business is rapidly changing and expanding, it could potentially fail. Cash should be conserved and only spent when it’s necessary.
A new business should operate within its cash flow limits. This helps to ensure the business is adequately funded.
As you start your business, you realize how important it is to ask for help. You quickly learn that you can’t do everything on your own. While this is the case, you can’t go hire a complete team to help you with your business. Doing this will burn through your business capital very quickly.
You just don’t know where help is truly needed. You could hire a new employee to help you with your business, but you may find out that you really didn’t need an extra employee then.
You may need to bring on a few people to help you run the business. Ideally, these people would be “jacks-of-all-trades”, meaning they are comfortable performing a wide variety of tasks.
For now, you can postpone forming specialized roles. You can hire an HR manager, marketer, or an in-house accountant once you determine the limits of your own time management.
Payroll is a cost that occurs on a set schedule. If a company isn’t making sales during that set schedule, the cost eats into the bottom line. Know your profits and set limits. If you’re not careful, you could easily find yourself operating with negative cash flow. You don’t want to be that guy, right?
It’s normal for businesses to experience growing pains. Many founders seek to bring in outside leadership and/or outside consultants when results don’t immediately meet their expectations.
Simply because your business hasn’t met its goals yet, does not mean you can’t or shouldn’t achieve them. Nobody knows your business the way you do. Also, nobody shares your same level of commitment and passion for your business. Don’t bet against yourself.
When you give up your position as the head of an organization, you reveal your secrets to your successor. Until a person has built a highly successful version of your idea, no one, including outside experts, knows the recipe. They may think they do, but they are really just speculating… at an expensive rate.
Owning a business means you will have a bumpy road. Be prepared to stumble and learn from your mistakes. Keep improving and don’t look to hire a CEO before you are ready.
Running a business means having to juggle multiple responsibilities. As a dreamer and a business owner, you have to be realistic about the size of the space you lease. Being realistic means avoiding large, expensive leases. Larger spaces equate to higher rent and utilities and increased upkeep costs.
The most important consideration is having a space large enough to accommodate the business’s growth. The business will outgrow small spaces and moving will incur costs and disturb the business’s operations. Large spaces will increase rent and may not be financially justified.
You need to make sure you find the right amount of space. It should be large enough to comfortably fit your employees and provide a little more space. This way you will not have to pay for extra unoccupied space.
Here is another idea. Look for spaces that have vacant units on both sides. If your business grows quickly, you might be able to expand to the space next door instead of having to move your business to a new location.
Most founders are surprised by this fact. It can be tempting to use free trials, or to purchase the cheapest or most short-term options available. In the end, these decisions often increase costs.
Using cheap, low-quality options often results in added costs. Additional features or better service quality may be available if a slightly more expensive option is chosen.
Using multiple service providers can disrupt and complicate systems, and increase the time needed to manage those systems.
Which products and services will you use for the life of your business? Always invest properly in these.
Accounting software is a good example. Often, month-to-month accounts cost more than a 12 or 24 month subscription. The savings can be in the thousands of dollars. You should consider the costs of accounting over the life of your business.
Figure 2: Example illustration. Ultimately, paying yearly costs can be cheaper than paying monthly costs
It’s more difficult to give up $1,000 than $100. However, if the $1,000 gives you a better long-term value, it should be the more prudent choice.
You should allocate your money to the things that help you make and increase your money. Do not skimp on the important things. Being super frugal can actually cost you more in the long run.
It’s a given that as a startup, you’ll begin receiving unsolicited sales pitches. Be it calls, emails, or ads, you will be targeted relentlessly. Vendors thrive on the perception that startup founders don’t have access to the right tools and resources to run their business.
That perception is greatly overstated.
You really don’t need the majority of the resources that are pushed your way.
Realistically, what do you need to open the doors of your business and operate for the first month? You should buy that first. Anything that allows your business to function is a necessity. If your business can operate without it, then it is not necessary.
Figure 3: A simple means of differentiating between essential and nonessential purchases.
Study how the business operates in the first few months. Look for the problems your team encounters regularly. Afterwards, provide a solution for these problems.
There may be interesting outcomes. Employees may be able to identify and implement solutions to some of the issues that management may not be able to find. There are problems that may be expected, but may not occur. Be prepared to say “no” to solutions for problems that are not occurring.
Finance is the language of business. Understanding and tracking your finances is essential to growing your business and reaching your goals. A solid understanding of accounting will help build a more profitable business. Neglecting this aspect of your company will definitely hurt your success.
This is the one thing you can outsource from the start. If accounting is your specialty, you can probably skip this section. If not, move on quickly.
If you don’t have your books in order you are living a stressful life. At the end of the year you’re going to spend money to have this work done anyway. You may as well have it done throughout the year.
It is an investment to your business.
Needless to say, personal taxes can get complicated. The same can be said for business taxes. An accountant can help you maximize your business tax write-offs, and help you save money come tax time. An accountant can also educate you on estimated quarterly taxes and help you throughout the year with decisions that can affect the bottom line for your business.
Marketing has value comparable to accounting. If a company has no clients, it will have no income. Many startups, however, spend too much on marketing and do not analyze which methods give the best results.
You don’t have to invest in billboards and other forms of traditional advertising to kickstart your business. During the early stages, focus on affordable or no-cost methods.
Social media is perhaps the most convenient and direct opportunity. Create business profiles and pages. Post regularly and respond to comments.
Advertising through word of mouth or in-person networks in your area are traditional methods to consider as well. Community or business fairs and other related events are relatively affordable. These methods help strengthen your customer relationships.
After learning the basics, you can purchase advanced options. However, do not purchase options too quickly. Premature spending on ads reduces your profit and can put your company in a dangerous position.
Most of the time when people realize they are overspending, it is because of a string of repeated small decisions. It’s important to be able to identify these decisions so you can change your ways before you have no money left.
Expenses like rent, salary obligations, and subscriptions are continuous costs. These expenses don’t slow down or stop even in a down month. If the cost of running your business increases and your revenue stays the same, your ability to absorb shock declines, and you should slow your spending.
Subscriptions and equipment need to be checked regularly. It is not uncommon for a startup to pay for a service or software and never use it. Any unused services should be cancelled. Cancelling small monthly services can result in significant savings over the course of a year.
Consider why your last few tool purchases were made. If the reason is “because the salesperson was persuasive”, that is a warning sign. The tool you purchase should be because of an already existing problem. Purchasing a tool because of persuasion leads to buying tools out of fear of missing out (FOMO).
What do all of the mistakes above have in common? Each of them happens as a result of trying to do too much too quickly. The solution, therefore, is to take things easy and let your business slowly and deliberately grow to where you want it to be.
In the future, you’ll likely have more employees and be in more need of additional office space. For now, consider the essence of your business and the reasons you started it. The additional things you’ll want to consider and the other things you’ll want to do will typically take care of themselves.
Trying to take care of too many things will ultimately cause you to lose focus and for your business to operate inefficiently. Be patient and reasonable, and your business will reward you for it.
Go through these checks before making a large purchase.
There are many small decisions that contribute to the failure of a startup. Funds can dry up from spreading the company too thin with too many employees and too much space. Outspending the competition with an ads blitz can also burn through the cash quickly.
Start smart. Start small. Start with control. Bring generalists on first to buy you time to train them for bigger roles. Keep your principles where you need them most. Outsource your bookkeeping and financial management. Be selective about the growth of your company.
Listen to your gut. Spend when you absolutely need to. Curb your desire to spend frivolously and focus on the goals that help your business the most. This will allow you to not only have the means to achieve your goals, but the focus as well.
The biggest issue is spending too much. Over-hiring and overspending on infrastructure and equipment are all major problems. When a company begins to grow, there is always the fear of becoming constrained and stifled by fixed costs.
Yes. Unless you have a background in finance, it’s a good idea to outsource this task. A good accountant will help you identify and claim tax write-offs and will assist you with projecting and planning for taxes.
No. You typically get what you pay for. A good, long-term subscription for a business service will usually be cheaper than the alternatives over the life of the service.
You can always rely on free marketing. The best free methods to market a business are personally meeting customers and marketing to them face to face and using the Internet to reach as wide of an audience as possible. As the business begins to generate a profit, you can experiment with paying for advertising.
