With the current economy entering a stage of uncertainty, startups are faced with two potential outcomes - sink or swim. While a recession is looming, the best thing founders can do is to buckle down and prepare for what lies ahead.
So how can a startup founder stay agile and prepare for an unpredictable future?
By reducing their cash burn rate and extending their runway.
The burn rate is the rate at which a new startup is spending its VC funding to finance overhead before generating a positive cash flow. The cash runway is the amount of time a business has until they run out of its cash reserves.
One of the best ways for a company to execute both of these initiatives is to rethink its operating expenses (OPEX). Operating expenses are the ongoing costs a company incurs through normal business operations.
Operating costs include the following:
- Maintenance and repairs
- Property taxes
- Office supplies
- Advertising & promotion
- Any overhead cost
How to cut down on operational expenses
Trimming OPEX is especially important during an economic downturn, as startups need as much cash runway as possible to stay afloat.
According to CB Insights, a startup should have a runway of 18 to 24 months. By reducing operational costs, companies can shave away unnecessary spending, reallocate money where needed, and ultimately improve their overall budgeting processes.
In this article, we're going to cover the top five ways to reduce operating costs so your organization can extend its runway and allocate budget to more strategic business initiatives that support a positive ROI.
The five points we'll be covering include:
- Conduct variance analysis
- Cut down on sales & marketing spend
- Reconsider headcount spending
- Cut down on non-essential spending
- Renegotiate with vendors
Conduct budget variance analysis
Budget variance analysis is a critical component of corporate performance management and is widely used across all finance teams. Variance analysis is comparing actuals to the budget values of a given time period and analyzing the differences. Once you're able to take a pulse on your company’s performance through budget variance analysis, you can then start eliminating unnecessary spending and create a cost reduction strategy.
After you’ve run the numbers, discuss with your team to see which tools and resources they actually need. From there, move on to your suppliers to see which ones contribute to your company’s ROI. If they're not adding value or serving an essential function within your team, it’s time to cut them.
To help you get started, make a list of operational essentials vs. nice-to-haves and start eliminating the additional expenses that do not contribute to revenue. By eliminating these low-hanging fruit, you can improve your company's overall operational efficiency and maximize profit margins.
Cut down on sales & marketing spend
Sales and marketing contribute to some of the highest operational expenses in a company. While we don’t suggest completely removing sales and marketing from the equation, you can still reduce spend and invest those resources elsewhere.
Ask yourself, “What marketing and sales initiatives are actually driving ROI?” Then, take a moment to think about your company’s ad spend. LinkedIn and Google ads can cost thousands of dollars each month. If it is driving a steady stream of inbound leads, then it may be a worthy investment. However, if your leads are slowly trickling in, it may be time to reduce the budget and allocate it to other projects.
When reviewing spend for sales and marketing, analyze activity to see which channels are performing the best and focus budget on those initiatives. By prioritizing the most impactful activities, your team will be able to cut down on the nice-to-haves and reduce spend on projects that won’t move the needle in the short or medium term. Consider re-forecasting your budget so your sales and marketing teams are working as efficiently as possible.
Reconsider headcount spending
A company’s number one expense is its people. While it may seem difficult to cut headcount spending costs, you may want to consider a hiring freeze or refrain from replacing employees that leave from natural attrition to control your spend. These efforts can help improve operational efficiency and cut down on OPEX.
When it comes to the overhead cost associated with headcount planning, reconsider your company’s employee rewards structure. This can include how often the company offers salary increases, setting a cap on the percentage someone can receive during a salary increase, offering equity instead of higher pay, and considering other non-essential perks that are given to employees. While this may not be ideal, it is still a better option compared to letting people go.
Cut down on non-essential overhead expenses
Have you ever considered cutting back expenses related to your office space? In today’s post-COVID world, many companies are moving towards a more remote or hybrid model, which is a good opportunity to cut back on overhead costs while also offering more flexibility to their employees.
Shifting to a work-from-home or hybrid work model is an effective way for founders to save money. From office supplies to energy consumption, these additional costs add up and can make a great impact on your company’s overall savings.
To support this point, it's also a good idea to eliminate non-essential business travel. Now that teams have the resources to work remotely through video conferencing platforms and multiple collaboration tools, business travel is an operational cost that can easily be cut from the equation.
Renegotiate with vendors
If you choose to stay in an office space, consider renegotiating with your landlord to see if they will give you better payment terms if you commit to longer contract terms.
You also want to be strategic with the tools that make up your tech stack. While software may have an initial upfront cost, it can save the company a considerable amount of money in the long run. Try to consolidate the different platforms you use and only pay for the ones that are the most essential. Once you have a list of your most critical tools, Talk with your vendors to see if you can switch to a more basic plan and only pay for the features you absolutely need.
If any of your vendors are unwilling to work with you, consider switching to a more affordable vendor or office space.
Managing cash flows
Having a hold of your finances is the best way to manage a company’s cash flow. By forecasting regularly and following a cost reduction strategy, you'll be able to course-correct as needed to slow down cash burn.
For more advice and insights about financial operations, check out our library of articles on the topic right here.