How to Reduce Your Startup’s Operating Expenses (And Still Get Things Done)
By now, it’s becoming clear that the economic disruption caused by COVID-19 is unlikely to vanish anytime soon. For many startups, this means contending with increased cash burn and a shorter runway, at least in the near future.
One of the most straightforward ways to reduce that problem is to lower your operating expenses. If you’re spending less money each month, then obviously your burn rate is lower, creating more runway. Even if your business has been minimally affected so far, you may be looking for ways to cut expenses so that you have more cash on hand in case things change.
At the same time, overreacting can be a problem too. You want to lower your monthly operating costs, but you also need to be able to get things done and position your business to thrive. Here are 5 ways to cut your expenses, from least to most disruptive.
1) Rework your operating budget
When you put together your budget for 2020, it was almost certainly for a different world than the one we live in right now. With everything that’s changed since February, it’s a good idea to take another look at what you planned to spend, and where.
Approach this with an eye towards how your business is likely to look for the next year. If you anticipate fewer sales opportunities and higher churn, for example, then it might make sense to shift budget priority from sales and marketing into customer success. In that business environment, your growth efforts are likely to be less effective anyway, while retaining the customers you do have becomes more important than ever.
A very important caveat, however: wherever possible, base decisions on your company’s specific numbers, not general guesses. Some companies are actually seeing improvements in their marketing ROI. For those companies, shifting budget away marketing might not be such a great idea.
2) Reconsider big investments
If you were planning any large expenditures this year, now is a good time to rethink that.
By now, you’ve probably updated your revenue projections based on the current economic situation (and if you haven’t, now is definitely the time). Before you make a significant purchase, rerun your numbers with those updated projections. Does it still make sense?
For capital investments to support growth, such as new equipment or facilities, consider what ROI you’re likely to see and when. If current macroeconomics mean your near-term growth opportunities are likely to stall, it might make more sense to delay those growth plans until your market has stabilized.
This applies to other large expenditures as well, such as marketing costs. Carefully consider the value you expect to get back; like the capital investments, it may make more sense to postpone big marketing pushes until a more favorable time.
3) Renegotiate where you can
The breadth of the current economic crisis means virtually every company is affected. Your partners and vendors may be willing to work with you on adjusting payment terms to help your business stay steady.
For most companies, one of the largest fixed costs is rent. And for most of us across the US, those expensive offices are currently sitting empty as employees work from home under shelter-in-place orders. See if your landlord is open to renegotiation, or if your contract has provisions for the premises being unusable.
You probably also have a number of subscriptions active, from SaaS licenses to professional services. If you reach out to these partners and discuss with them, some may be open to measures like temporary discounts or lengthening payment cycles. In extreme cases, you may be able to negotiate out of early termination penalties for services you simply can’t afford to keep.
It won’t always be possible to get new terms, but you never know until you ask.
4) Keep only essential tools
If software and services are taking a big part of your budget, it’s time to consider what’s non-essential in your daily operations.
Take a comprehensive inventory of all the tools and services your company uses, how much they cost, and what they’re being used for. One of the best ways to do this is to simply go line by line in your financial statements, and see each place that money is actually going (this is one of the many reasons it pays to have accurate bookkeeping).
Often these exercises will turn up some obvious opportunities; it’s extremely common for businesses to discover they’re paying for software tools with duplicate functions, or that no one is actually using. Eliminating unused or redundant tools is a quick win for reducing operating costs.
For the rest of your tools, take a critical look at what they’re used for, who’s using them, and if they’re providing value to justify the costs. Does everyone who has a license actually need to have a license? Are there software tools that are more nice-to-have, with functions the team could work without? Would dropping them be practical, or would the resulting workflow changes create a costly distraction from your team’s purpose?
For this process, it’s vital to work closely with your team leads to determine what’s actually non-essential. It can be tempting to just look for the highest costs and slash those, but cutting the wrong things can backfire. If losing a tool creates an extra hour of manual work each day for your engineers, that’s an hour they aren’t building your next feature. The lost productivity will probably cost more than the tool did.
5) Reduce payroll costs
Taking actions that affect your team are usually a last resort, but sometimes it’s unavoidable. For most startups, payroll is the biggest expenditure, and if your business is severely impacted by the downturn you may have to make cuts here to stay afloat. However, “cuts” doesn’t have to mean layoffs. There are several other steps you can take first.
Before we get into those, it’s worth noting that the federal Paycheck Protection Program loan initiative for small businesses is specifically intended to help cover your payrolls costs and prevent layoffs. If you’re in a position where you may have to reduce payroll, it’s worth researching if you’re qualified for the PPP.
If you do need to cut payroll costs, instituting a hiring freeze is a good first step. While this doesn’t reduce your expenses, it prevents them from growing. It also frees up any money you had previously budgeted to spend on future hire salaries, which can give you a cushion on your runway.
You can also reduce your payroll without reducing your headcount. If you planned to give your team bonuses, consider postponing or cancelling these to preserve capital for operating costs. You may also need to consider lowering your employees’ salaries. This is never a popular move, but it can be the difference between keeping the team intact or having to resort to a layoff.
If you do need to cut salaries, be mindful of how this could affect your employees’ circumstances. At first glance it may seem the most “fair” to cut salaries by a flat percentage across the board. But it’s less fair than it sounds. For your highest-paid employees, a 10% pay cut might be an inconvenience; for your lowest-paid, it might mean they can’t make rent. If you find you need to cut salaries, best practice is to cut more from the higher end who can most afford it, and cut the least from the low end who can’t.
If salary cuts aren’t enough, you may be able to furlough some of your employees instead of permanently laying them off. Although being on furlough means people won’t be paid, they’ll still technically be your employees – which means they’ll retain their healthcare benefits. Due to the current crisis, the government is currently offering enhanced unemployment benefits, paying a higher amount for a longer period than normal. Furloughed employees can generally apply for these benefits as well.
Finally, if you have no choice but to permanently reduce headcount: run your numbers, determine what you need to do to get back to steady footing, and do it all at once. Layoffs negatively affect morale; that’s generally unavoidable. What makes it worse, however, is ongoing uncertainty. Be transparent about what’s happening and why, and then explain to your team why you don’t anticipate further reductions.
The near future is likely to be a difficult business environment, for everyone. By paying close attention to your operating expenses, and knowing where to lower them, you can put your startup on stronger financial footing for whatever 2020 throws at us next.