The booming tech economy has produced a wave of smart, ambitious entrepreneurs intent on creating fast-growing companies that can disrupt existing markets or even create new ones.
As with any new business, though, solid, common-sense business principles can mean the difference between prudent growth and excessive spending that can derail a promising startup.
We asked Jeremy Office, a financial advisor to entrepreneurs based in Delray Beach, Florida, and a member of NerdWallet’s Ask an Advisor network, about how startups can control their “burn rate,” manage cash flow effectively and spend their money on the right things.
How can entrepreneurs control costs in the early months of a startup?
First, establish your core focus and identify “must-haves” to accomplish. Don’t get caught up in the luxuries, such as the fastest computer or elaborate furniture. This serves two purposes: You don’t waste money, and you don’t waste time thinking about and buying things you may not need.
Next, identify a timeline early on and know when you need to incur expenses for the various stages of the company. For example, don’t hire a public relations company until you have developed the product or service you want to offer. Often, companies will hire service providers because they think they are needed to build a business rather than because they have an established plan for using the service provider.
One option is to “gamify” the process with built-in rewards. Hire or acquire only when you have reached a certain milestone, for example.
Finally, understand outsourcing and determine what can be applied to your business. Look at all aspects of the business, even down to whether you should hire a virtual assistant to free up your time from monotonous tasks.
How should entrepreneurs balance growth with keeping costs down?
Create a budget and growth forecast for the short term (three months) and long term (six to 12 months). Monitor the budget every couple of weeks and ensure costs are in line with your strategy for growth.
Stay focused on the expenses that are absolutely necessary for growth. It is often easy to get caught up in justifying expenses, especially when they are small (e.g., rarely used supplies or business lunches), even if they aren’t necessary to grow the business. Unfortunately, these expenses add up, and entrepreneurs find themselves in uncomfortable cash-flow positions because they didn’t stick to mission-critical expenses.
While it is easy to focus on controlling expenses, true entrepreneurs focus on the top line. Any activity that is supporting business development and growth, as long as it is rational, should move to the top of the priority list when deciding where to allocate working capital.
Consistently monitor and reassess expenses. Sometimes you may not be spending enough in certain areas and you have to shift expenditures accordingly.
Any other tips on controlling burn rate?
Don’t work in a vacuum — discuss your expenses with a trusted resource. Talking about expenses openly with colleagues or trusted advisors often leads to a realization of whether expenses are justified or not.
And make sure they know you are soliciting their honest opinion. It is critical they feel comfortable giving their genuine feedback.