We all know that the majority of startups and small businesses fail within the first few years of operation - even good businesses with amazing products and solid backing. So how do these businesses go under?
Most of the time it comes down to money. Businesses start running out of working capital, or can’t maintain a positive cash flow, and are forced to close their doors before making any consistent profits. The first few years of operations demand frugality, but you can’t cut all your costs, or you wouldn’t have a business in the first place.
So where are the best places to cut costs, maximizing your cash flow and minimizing the impact to your business?
Best Cost-Cutting Strategies
These are some of the best strategies for early-stage businesses:
Reduce utility costs. First, try decreasing utility costs by increasing the energy efficiency of your building, reducing your need for heating, cooling, and lights, and negotiating for lower costs of things like Internet and phone plans. According to LennoxPros, 'new technologies like smart thermostats and better HVAC units make it possible for small businesses to save thousands of dollars on utility costs.' This could be crucial during your most vulnerable early stages of development.
Restrict hiring to necessities. It’s tempting to get a good team in place as early as possible - that way, you have backup if you start to take off unexpectedly, and you have more time to train dedicated candidates. However, it’s better to restrict your hiring to only the people necessary to keep your business moving. You’ll also want to take your time with your hiring decisions, only hiring candidates who you’re absolutely sure will be a boon to your organization. In the words of Red Adair, 'If you think it’s expensive to hire a professional, wait until you hire an amateur.' Hiring a better candidate now could save you a ton of time and money later.
Opt for a smaller office. A bigger, swankier office might be more impressive to clients and might make you feel more pride in your business, but it won’t be worth it if it leads to your undoing. Consider opting for a smaller, more reasonably priced office with lower rent - even saving a few hundred dollars a month could be enough to help you scrape by those first couple of years.
Consider remote work. You could also do away with the office - and the expenses that come with it - altogether. Some companies, including Upworthy and Buffer, pride themselves on being exclusively focused on remote work. If you’re open to the option of having your staff work from home, it’s an extremely valuable policy. You’ll save not just on rent and utility costs, but also on commute time and expenses (in your personal life), and office supply expenses like computers, furniture, and paper.
Find better vendor and partner deals. Most businesses rely on at least some vendors and partnerships to complete their services; these are major expenses that directly affect your profitability, so make sure you’re getting the best deals possible. You can do this either by scouting for new potential partners or renegotiating terms with the ones you already have. In a long-term arrangement, every dollar you can save per transaction can count.
Market yourself efficiently. You almost have to spend money on marketing, but how you spend that money can make a big difference to your bottom line. Not all strategies offer the same return on your investment (ROI), so opt for ones with the highest long-term yield. For example, email marketing and content marketing have a much higher potential return than direct advertising and also come with a less burdensome demand for initial investment. If you invest in multiple marketing channels, pay attention to which ones perform best, and don’t be afraid to cut the dead weight.
Avoid unnecessary expenditures. This may seem like an obvious tip, but it’s important you don’t neglect it. Most businesses end up spending money frivolously, at least in certain areas, without even realizing it. For example, did you go all-out for your launch party? Are you taking your clients to the best restaurants in the city? Are you buying silly decorations to make your workplace seem more fun to your employees? If you’re in doubt, your accountant should be able to help you pinpoint areas of unnecessary expense.
Fighting Costs With More Income
Even bigger, more successful companies are forced to cut costs in response to changing market situations, new demands, or a simple bid to turn a higher profit. But cutting costs isn’t the only way to improve your company’s longevity and increase profitability. In addition to minimizing your unnecessary expenses, opt to secure as many consistent lines of inbound revenue as early as possible for your business. Seek retainer clients, improve client retention, and consider secondary means of income like advertising or affiliate linking; the more consistent income you have, the less you’ll have to worry about remaining frugal.