The Entrepreneur’s Guide to Successfully Planning Business Expenses
In the beginning of a startup, costs are low. How much does it cost for two guys that don’t get paid working in their garage? Maybe you need a few pads of paper and box of pens at first, but business expenses grow over time. Eventually you need to move beyond the concept and early product prototyping phase, and this required additional capital and people. Whether you decide to contact Equify Financial today or you already have the funds secured for your business, finances is something you need to carefully think about.
In the startup world, time is the most precious commodity. You can’t create more time, and it always marches forward. Your customers won’t wait for you, and your competitors will try to catch you. You have to make choices every day about where to focus and what to leave behind. There are many significant opportunity and inefficiency costs. You must be as productive as is humanly possible.
Of course, there are the direct costs that you spend as a startup as well, but even in these large buckets of cost, there needs to be considered around these hidden costs. I see so many startups being “penny wise and pound foolish”, and a big part of this is how investors and boards of directors frequently focus on the minutia rather than the big picture. Some aspiring entrepreneurs find it useful to read other people’s experiences with setting up a business, if this is the case for you, you could always click this link to read Carlos’ story. In this story, Carlos discusses location and working hours, which could be useful when trying to cost-cut your business. To hear some of our tips about cutting down business expenses, keep reading.
The war for talent is one of the most significant expenses and investment areas for any startup. You start to incur these costs as soon as you make the decision to hire people. If you are building a world-class team, you need to do scouting, recruiting, hiring, and on-boarding. All of these things have direct cost and opportunity costs. This is on top of the costs associated with paying yourself and your co-founders a salary, and eventually, other employees. In addition, the right way to look at people cost is on a fully loaded cost basis including benefits, facilities, insurance, IT, and the like. You’ll also need to think about any technology products such as project management software, that you’ll need. It might be worth reading about them to learn the benefits.
Even considering all of these costs, the importance of making people as productive as possible as quickly as possible is paramount. Also, you should have a cultural goal. Having that as part of the screening and hiring process is critical. Startups are much like a team sport, and you need to have productive individuals and productive teams to win.
(2) Facilities & Administration
At some point, you need to move out of the garage and into an office. You need a place to work, and that will include expenses like tenant improvements (TIs) that you may need to make facilities suitable for your purpose. You will have rent, utilities, communications, IT, furniture, supplies and Business fuel cards for the businesses employees. How nice of a facility do you really want and need? What is suitable for your employees? What do you need to convey a proper image to your suppliers and customers? These are all choices you will need to make at least every two to three years. There is significant productivity loss every time you move, so try to make facilities decisions that can scale at a reasonable level over a two year period.
On the administrative side, even if you outsource, you will have bookkeeping, accounting, legal, finance, insurance and compliance costs. In making decisions in this area, it is more than make-versus-buy. It is also about productivity and teamwork. I would much rather spend a little more on a highly competent and experienced attorney than to have someone that is super green. The costs of doing something wrong can be catastrophic for a startup.
(3) Product Development
In addition to people costs for product development, there can be significant costs for lab equipment, tools, and processes. Some of these are hard costs, while others are soft costs. Purchasing workstations, oscilloscopes, scanning electron microscopes, and wet lab equipment are all hard costs. However, if you don’t have the right training, processes and procedures, you can incur high costs in time and quality, sometimes causing you to redo things over and over. This is to be avoided at all cost. Time to market, speed of decision making, and efficiency are some of a startup’s biggest weapons. Big companies have more money, lots of talent and more resources than you. You need to be speedy, nimble, and efficient, otherwise it is extremely difficult to win. One concept that is very important in this area is the idea of a minimum viable product, or MVP, as discussed by Eric Reis in The Lean Startup. Reis defines a MVP as “[the] version of a new product which allows a team to collect the maximum amount of validated learning about customers with the least effort”.
(4) Operations & Manufacturing
Once you actually have a product and are shipping it, you will have a supply chain and vendors that need to be managed. You will have inventory, AR/AP, credit & collections, and the necessity for management control systems to ensure that things are done correctly, legally, and with integrity. If you are making a product that will ship in massive unit volumes, you will need to instill quality control systems to ensure that you are not throwing away large amounts of money, or even worse, shipping defective product to your customers.
(5) Marketing & Sales
Marketing is about building brand awareness, generating customer interest, and competitive positioning. Marketing department’s job is to understand the customers in the context of the target market being served. Marketing also provides the tools and training necessary to make products easier for customers to use, and easier for salespeople to sell. Some of the functions that need to be managed by marketing are public relations, communications, advertising, and brand management. In today’s online world, you also need to have a digital marketing strategy that includes a killer website and content marketing. Ultimately, marketing’s job is to drive lead generation in the target product-market segment, and help to win customers.
The sales function is complementary to marketing, and its focus is on managing the customer relationship, driving action, lead conversion and closing sales. Implicit in this is a customer service component. There are also travel and entertainment expenses. With all of the marketing and sales expenses combined, you can see that the overall cost of sales is a significant and frequently overlooked cost in a startup. Most investors will be as interested in you customer engagement strategy, your customer acquisition costs, and the total value of a customer, as they are in your product.
In a startup, keeping “gas in the tank” is a key part of the job description of the CEO, and frequently the CFO. Without fuel, it is not possible to launch a rocket. Similarly, without adequate capital, it is hard to build a startup from an idea, into a product, and eventually into a company. You need to know if you have the Essential Elements of a Fundable Startup Business. The direct costs in raising money include travel and management time. However, this is an area of expenses where there can be massive efficiency loss, productivity loss, and opportunity cost. Running a process and having a “captain at the helm” that knows how to balance the operational challenges of building and running a company, with the challenges of keeping a flow of money to execute the plan, is a very important skill set for any startup CEO. It is an area that is frequently overlooked and misunderstood by many startups and founding teams. It is frequently the cause of the ultimate demise of most startups.
(7) Decision Making
As mentioned earlier, speed of decision-making is one of the most important weapons in a startup. Implicit in decision making is risk management. I is worth checking out the article in Forbes, Decision Making: Tips for First Time Startup CEOs, and it isn’t just for first timers. As it states, time is money. This is universally true, but even more so in a startup. Efficiently and productively making good decision is essential for startup success. This is an area where there can be loss of time, and substantial opportunity cost. Time to market and time to revenue are both critically important metrics for any company, but especially for a startup. Running a big company is akin to driving across the country. Running a startup is more like launching a F-16 fighter plane from an aircraft carrier. You only have so much runway, so you better use it properly.
Leadership and management is another significant component in decision making. As a company founder, you need to accurately and clinically assess your own skill set versus the needs of the company. You should surround yourself with capable mentors and advisors that can give you guidance based on experience and expertise, not just theory. You may also need to make a decision at some point to bring an outside CEO or executives into the company that can help the company get to “the next level”. There are never easy decisions, but they can sometimes be the difference between success and failure.
This is Patrick Henry, CEO of QuestFusion, with The Real Deal…What Matters.