Reduce your operating costs to extend your financial runway, find profitability, and improve your margins and competitive advantage.
Operating costs can eat you alive whether you are a new startup or established corporation operating at scale. It is always wise to routinely evaluate operating expenses and look for ways to improve them. During times of crisis and economic recessions, it can be even more vital to look for business cost-cutting opportunities.
Here are some of the key ways to do this and come out even stronger…
Slash Commercial Real Estate Space
Very few businesses have really needed any physical real estate for over a decade. If you are still holding any, it’s time to let it go. The faster you do it, the better. This is the typical advice that you would get from the best startup accelerator program.
This is most obviously true of office and retail space. Yet, in many cases, it may apply to storage space, warehouses, and other types of real estate too.
Some of the biggest and longest-running brands have permanently closed all of their physical retail locations. Including AT&T and Microsoft. Brands like Gap have stopped paying all leases.
If you own it, sell it while values are still good. If you lease, sublease it, or negotiate an exit.
Subscription services have exploded in the past few years. Their popularity has created multi-billion dollar startup success stories. Yet, both businesses and individuals are finding their finances swamped by them. Each may not seem like a large expense on their own. That’s the point. They are often priced so that you just don’t bother to cancel them. They can add up fast though.
This can be hundreds and thousands of dollars in underused subscription products and services each month. That’s deadweight which can instantly become profit or can support other things you really need to spend on to grow your business.
This often includes various software and cloud services you can easily do without. Look for free replacements or at least more cost-effective options.
Switch To On-Demand Contractors
Just as the office spaces of the industrial era went the way of the dinosaur, so has the sense in having in-house salaried staff for the overwhelming majority of companies. They are now a major liability and luxury that all but a very few can afford.
Instead of giving up equity and stock options, providing hefty benefits packages, and competing on frivolous perks, on top of salaries, businesses need to be using on-demand contractors.
It eliminates that extra spread in compensation which neither employer or employee get. It reduces insurance needs. It eliminates expenses for equipment and company paid communications. No more company paid vehicles or transportation costs either.
Perhaps, most importantly, it means only paying for the labor hours you need, and operating far more efficiently on many levels.
Hire Better Quality Talent
The above also empowers businesses to hire better quality talent. Hiring remotely means access to world-class talent with expertise in your domain.
Since you only pay for the hours you need, you can afford to pay a lot more and focus on the results instead. Remember, it’s not the hourly rate you put out, but the return you get on that dollar. You might find in some roles you get a whole lot more at $200 an hour than $20 an hour. You may achieve 10x the results in a tenth of the time.
Streamline Decision Making
Sluggish decision making has plenty of negative consequences. In this case, it is extremely costly. Having multiple meetings and paying staff for that time adds to operating costs. Delaying critical decisions which could save you money, can eliminate your options, and speed up the demise of your company. Empower others to make as many decisions as possible, and give yourself deadlines too.
Restructure Debt & Financing
Debt service can be a big drain on your business. Especially in times of crisis and recession, there can be opportunities to restructure debt and negotiate lower interest rates and payments. Maybe even settle for a lower early payoff.
In better economic periods, you may be able to refinance debt. Take advantage of introductory deals, and extend terms.
Demand Better ROI On Your Marketing
Marketing is a necessary expense. Even in the toughest times, businesses need to be increasing their marketing. If you stop marketing, you stop getting sales, the cash flow stops, and you are finished. It is just a matter of how fast.
Still, it is the company in your space that is most cost-effective in their marketing which will win in the long run. The better your ROI, the more profitable it is. The more marketing you can afford to do, and more market share you will win.
It may be time for a fresh marketing strategy and plan. Or, it may be a matter of optimizing your website and advertising for conversions.
Others may find starting affiliate and referral programs versus doing paid advertising is the way to go, to survive budget crunches and marketing inefficiencies.
Prepay For Services
If you have the financial capability, negotiate discounts with suppliers and service providers for paying in advance. This could be months or a year. Then move up tax breaks and take the benefits earlier.
Automating your finances, payroll, and bill paying can translate into less labor cost, less late fees and interest, and more motivated teams who know they are going to get paid on time predictably.
Alejandro Cremades is a serial entrepreneur and the author of The Art of Startup Fundraising. With a foreword by ‘Shark Tank‘ star Barbara Corcoran, and published by John Wiley & Sons, the book was named one of the best books for entrepreneurs. The book offers a step-by-step guide to today‘s way of raising money for entrepreneurs.
Most recently, Alejandro built and exited CoFoundersLab which is one of the largest communities of founders online.
Prior to CoFoundersLab, Alejandro worked as a lawyer at King & Spalding where he was involved in one of the biggest investment arbitration cases in history ($113 billion at stake).
Alejandro is an active speaker and has given guest lectures at the Wharton School of Business, Columbia Business School, and at NYU Stern School of Business.
Alejandro has been involved with the JOBS Act since inception and was invited to the White House and the US House of Representatives to provide his stands on the new regulatory changes concerning fundraising online.