How to Lower Operating Costs for Your Startup
An economic slowdown never occurs at a convenient time, and it is impossible to predict how long one will persist, so how can you lower operating costs? This means that many businesses will soon have to deal with higher financial burn and a shorter runway.
One of the simplest ways to deal with that problem is to reduce your operating expenses. If you’re spending less money each month, you’ll have more runway because your burn rate will be lower. To successfully navigate a downturn, for instance, you might need to put off long-term investments. Put off hiring new workers, and reduce or stop non-essential services and software tools. Even if the impact on your business has been minimal thus far, you might be looking for ways to cut costs. So that you have extra cash on hand in case things change.
However, occasionally overreacting can be detrimental. You need to be productive and put your business in a good position to succeed while still reducing your monthly operating expenses.
Avoid Making Major Investments
Consider carefully any major purchases you had planned for this year.
Without a doubt, in light of the current economic climate, you have already updated your income projections. Before you make a significant purchase, do your calculations again using those revised projections.
When making capital investments that encourage expansion, such as buying new facilities or equipment, think about the return on investment you’re likely to see and when. If current macroeconomic conditions suggest that your chances for near-term growth are going to stop. It may make more sense to delay your growth plans until your market has stabilized.
This is also true for other big expenses, such as marketing costs. Consider the value you anticipate receiving carefully. Similar to financial investments, it might be better to postpone major marketing endeavors until a more opportune time.
Adjust Your Operating Budget
You probably didn’t intend for the reality in which we currently live when you prepared your budget for the current year. Now that so much has changed since then, it would be a good idea to examine your spending and location goals.
As you approach this, take into account how your company will probably develop over the following year. For instance, if you expect fewer sales opportunities and higher turnover, it might make sense to shift the budget emphasis. From sales and marketing to customer success. In that environment, your efforts to grow your customer base will likely be less effective. Making it more important than ever to keep the current customers.
There is, however, a very important point: if possible, base decisions on your company’s exact numbers rather than generalizations. Some businesses are seeing an increase in their marketing ROI. It might not be the wisest course of action for such businesses to divert funds from marketing.
Identify Opportunities to Renegotiate Current Costs
An economic crisis might influence almost every firm. Suppliers and business partners may be ready to work with you to change payment terms.
One of the largest constant costs for businesses is often rent. Check your lease to check whether it has any revision provisions or if it mentions the potential of the property becoming uninhabitable.
You also probably have several active subscriptions, from SaaS licenses to professional services. Some of these partners may be open to measures like temporary reductions. Or longer payment periods if you speak with them and explain your position. In extreme cases, you might be able to negotiate your way out of early termination penalties for services you can’t truly afford to keep.
Although it won’t always be possible if you don’t ask, you’ll never know.
Eliminate All Unused Subscriptions
If software and services account for a sizeable amount of your company’s spending, it’s time to consider what is not essential for your daily operations.
Make a complete list of all the tools and services your company uses, their price, and their intended usage. One of the greatest ways to do this is to simply go line by line through your financial statement to ascertain where money is going.
These exercises will often point out some obvious cost-saving alternatives. Businesses frequently discover they are paying for software products with redundant features or ones that nobody uses. Eliminating unused or extra tools might help you quickly reduce operating costs.
Determine the intended use, intended audience, and whether the value of the remaining tools justifies the expense. Do this by carefully examining them. Is it necessary for everyone who has one to have a license? Is the team capable of operating without any desirable software tools? Is getting rid of them a wise move, or will the resulting adjustments to your team’s workflow be a costly detour from your team’s objective?
The key to this process is working closely with your team to decide what is not necessary. While it can be easy to solely pay attention to the highest costs and cut those, doing so can have unforeseen repercussions. Your engineers won’t be able to work on creating your next product if missing a tool makes them do an hour more of manual labor each day. Missed productivity will probably cost more than the instrument itself.
Reduced Payroll Costs
The last resort is frequently to act in a way that will affect your team, but there are times when it is unavoidable. Since payroll is often a startup’s biggest expense, if the economy is affecting your business, you may need to change your budget to stay afloat. However, cuts do not always result in layoffs. There are a couple of other things you can do first.
If you need to cut payroll costs, implementing a hiring freeze is a good first step. Even if it doesn’t reduce your expenses, it does prevent further increases. Furthermore, it releases any money you had set aside for the potential workers’ salaries, giving you some runway cushion.
Run your numbers, identify what needs to be done to reestablish stability, and apply it all at once if there is no other choice than to permanently reduce the number of employees. To avoid having to bring up layoffs again, the best course of action during a downturn is to commit to them. Do this as soon as you can and make a greater cut than is necessary. Employee morale generally declines when they are let go; this is typically unavoidable. But continuing ambiguity makes things worse. Be open and honest about what is happening and why, and then let your team know why you don’t think there will be any further cuts.
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