Cash flow is one of the major reasons for startup failure. A recent study by Fractl Research found that nearly 40% of funded businesses failed because they ran out of cash or weren’t able to secure more funding on time.
When your startup is young and not profitable yet, the money spent on rent, supplies and logistics can make a big dent in your monthly accounts. One way to improve cash flow is thus through minimizing overheads.
In this article, we will take a look at some of these strategies to bring overheads down and improve margins.
Real estate costs can be a big contributor to your monthly overheads. Spending hundreds or thousands of dollars each month for office space can set you back even before you make the first penny.
One way to overcome this is working remotely out of your home or garage for as long as you can. Some of the biggest businesses today like Apple and Google started out of their founders’ garage.
This solution may not be feasible in some cases. If you run a consultancy business, for instance, your clients may request meetings in your office. In such cases, it is a good idea to opt for a coworking space – this way, you get all the amenities of a real office without the exorbitant costs.
Coworking spaces are often priced per seat – so you only pay for the number of people in your team.
Some businesses need large operating spaces regardless of the size of their team. Rob Evans, the founder of Graviteq, an Australian rope access training company, faced this challenge since his business requires expensive real estate and equipment to operate.
He overcame this by sub-leasing space from another organization in exchange for a percent of all revenues. This, he says, works very well for his business since they don’t have to pay any rent when he is not making any money.
There are several components to every business and some have higher operational costs than others. Take the example of an eCommerce company selling t-shirts online.
Launching an online store, marketing it and answering customer queries are low overhead elements of the business. On the other hand, paying for inventory, stocking them and handling the shipping and returns are high overhead parts of the same business.
You can minimize overheads by outsourcing these components that cost money to operate. In the above example, you may choose to dropship your t-shirts so that all shipping and distribution related tasks are handled by your supplier and you may simply focus on tasks related to growing your business.
If you are building software, you could consider hiring an agency to handle the development – this way, you avoid recurring overheads like salaries that you have to pay for an in-house team instead.
Reallocate your spend
Some expenses are inevitable. If you have a sales team, you may consider a commission-based pay structure so that you only pay for successful conversions and do not have a recurring overhead.
Any business with an online presence may seek marketing either through PPC advertising or organic channels like SEO. PPC advertising is expensive, but can deliver returns on short notice.
SEO, on the other hand, can be cheaper, but can take a longer time in recovering the expenses.
At the outset, it may seem like investing in PPC is a better decision since returns are quicker.
However, this comes with a couple of disadvantages. Firstly, the overall overheads each month is typically higher with advertising. The budget for SEO, on the other hand, can be tweaked based on your funds.
For instance, with a smaller budget, you can perform keyword research on a smaller pool of targeted keywords while with a larger budget, you may target a larger pool each month.
Secondly, while SEO is an ongoing process, just like PPC, you can afford to bring down your spend over time, especially if you are dealing with low competition.
This is not true with PPC advertising since you lose your brand exposure the moment you stop advertising. So, the monthly overheads are a fixed cost with advertising – not something that is recommended for the long term.
It can be hard when you’re starting out as a new business. Put the cashflow management tips I’ve recommended into practice and you’ll find things are a little easier for you and your startup.
About the author: Anand Srinivasan is the founder of Hubbion, a suite of free business apps and services. Also, he is a regular contributor to Writerzone.net and writes on Internet Media Statistics at TechCrunchies.com. He is also a marketing consultant with over 8 years of experience.