You know it, and we know it.
Building a business is tough. And in a cold funding climate like we’re in now, some may say it’s even impossible.
But those people aren’t entrepreneurs. No one so negative could last five minutes on the roller coaster that is business growth.
No, it’s not impossible, but it sure is hard. And it should be! In the timeless words of former U.S. president Teddy Roosevelt, “It is not the critic who counts...the credit belongs to the person who’s in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs; who comes short again and again.”
So, before we go on, give yourself a pat on the back. You’re trying to do something great, and that’s, well, great.
But it doesn’t change the fact that business growth is hard to achieve, and the current business environment makes it even harder.
During times like these (and at all other times, too), it’s important to keep a hawk’s eye on your financial runway and manage your cash flow so you have the time - and money - to achieve business success.
To help, we’ve outlined the essential tips you need to extend your financial runway and give your business the gift of cash flow.
Salary and Wages
Employee compensation is usually the largest operating cost center of any startup. You may have launched the company with no employees, sure, but chances are you now have a few. In fact, you might have a bunch.
This is a good thing. It means your company is growing. But it’s also a double-edged sword because it’s your fastest growing expense. You have the salaries and wages you pay your employees, plus any benefits you give them, plus the taxes you pay on each team member. The costs quickly add up.
So, in order to extend your financial runway, explore these options to reduce your salary and wage expense:
Deferred compensation - No, this is different from variable compensation. While variable compensation is effective for sales people and similar roles, it’s not effective for company-wide implementation. Instead, if you’re trying to reduce your salary and wage expense while keeping your existing headcount, it might be good to look into deferred compensation.
This type of compensation structures salaries so that wages are are guaranteed. However, the salaries are deferred to a later period. This helps manage business cash flow. So, if you hire someone at $100k per year, you could structure the offer sheet so the employee’s paid $60k in 2017, and $40k on January 1, 2018. This allows you to extend your 2017 runway by $40k and lets you invest in your future growth.
Outsourced Consultants - If you read our two posts on outsourced employees, you already know the power of outsourcing. And, if you’re a growing startup, chances are you’ve experimented with outsourced hires.
If you haven’t, it’s time you started. Outsourced consultants give your business the opportunity of tapping into an experienced and proven resource for a fraction of the full-time cost. Let’s say, for example, that you need to ramp up your digital marketing in order to increase your sales. However, hiring a full-time marketing person reduces your runway the point where you can’t keep your business lights on.
What action do you take? It’s a “damned if you do, damned if you don’t” conundrum.
Well, luckily there’s a third option: Outsourcing. Instead of hiring someone full-time, you can engage a third party firm or freelancer to help you for a few months. This extends your runway and still gives you the needed marketing boost.
Equity Kickers - This one is pretty obvious to us startup folk, but it’s important to mention. Setting aside an equity pool for employees and using business ownership as a piece of their compensation is a great way to extend your runway.
It compensates your employees for the risk of investing their time in a startup, and it gives you more time to make your business a success. And then when you achieve infinite business growth, everyone benefits!
Servers and Other Technology Needs
Now, this really only applies to technology startups, but since more and more companies are entering the tech space, it’s important to discuss. I learned first-hand just how expensive servers, boxes, instances, and all the technology jargon needed to run a company are.
If your product is a web app or mobile app, odds are that you’re using virtualized servers a la Amazon’s AWS services. And they can get pricey! And of course, as you begin to scale, you’ll have to light up more and more boxes to meet the demand.
Luckily, there are now other options to AWS that can help you save money. Google and Facebook both have server space for rent, and it’s causing a price war, with tech startups as the beneficiaries. So, when you’re looking to extend your financial runway, make sure that you have the best mix of price and value when it comes to your server needs.
Further, look into the cost savings for annual and semi-annual plans. Services like AWS offer discounts for long-term deals, and it’s always best to lock in a low rate.
Now, if you aren’t a tech company, chances are you still rely on technology. You have a website, right?
It might sound small, but if you’re looking to extend your financial runway, every dollar counts. Look into different web hosting services as well as website providers. Do you use Wordpress? Squarespace? Bluehost? Each of these services has their own cost structure. Make sure you’re taking advantage of the best one for your company.
Office Space and Miscellaneous
Ok, we’ve now gotten to my favorite part of cost savings. For whatever reason, startups compete on gaudiness. Whatever organization has the biggest office space and the most delectable lunches seem to be the best.
These things, of course, attract talent, and talent is important. But how important is a top-tier developer when you run out of money?
Worthless, of course.
Rather than trying to seem successful with a big office and a fridge stocked full of Red Bull, why don’t you actually focus on being successful?
Rent a modest office space that fits your current headcount. This can reduce your operating expenses by as much as $20k - $30k.
And then, stop serving lunch five days a week. Get rid of the mini fridge full of beer. Instead, get your employees to invest in your cause because it’s a worthy one.
The mini fridge alone can save you a few thousand bucks a month. Add that to a reduced office expense and you’ve just given yourself the gift of time!
In business, cash is king. But even more important than cash is time.
Because in business, money buys you time.
And when you’re building an organization for long-term success, the best thing you can do is extend your financial runway and give you the opportunity to soar.
Therefore, it’s extremely important that you heed our words and watch you cash like a hawk.