Launching a new startup is always exciting. The upward potential in front of you is practically limitless. When you have the right idea at the right time, a startup that begins life as two people in a garage can eventually become a multi-billion-dollar enterprise.
But before you get to the beginning level — you’ll need to go through some difficult growing pains. Early in your startup’s development, you’ll likely be low on capital. Even if you have an angel investor or a venture capital (VC) firm backing you, you’ll have an abundance of expenses, limited income, and a finite amount of time before the money completely runs out.
Accordingly, you’ll need to be frugal. You’ll need to find creative ways to save money.
So what are the best ways to stay on the lean-side of things?
When to Save and When to Spend
First, you need to know that there are good ways and bad ways to save money. Saving money effectively isn’t just about reducing your expenses to the bare minimum; it’s about knowing what’s worth splurging on, what’s worth eliminating, and everything in between.
When to cut expenses is best understood with an example. Oftentimes, new startups are inclined to cut costs that seem superfluous or unnecessary for the core business model to function. For example, they may avoid digital marketing altogether, saving thousands of dollars in the process.
Cut or Keep?
But when you cut something that is essential in business — it is problematic; digital marketing is the best way for a startup to increase brand awareness and attract new paying customers.
In many cases, digital marketing offers a return on investment (ROI) of many times your initial capital, meaning $1,000 per month in spending could turn into $3,000 per month in revenue. Cutting this expense is often a terrible long-term move.
Knowing your costs and what that cost expendure will do for you — is the best ways to save money without compromising the integrity or long-term growth potential of your business.
One of your best options is to go fully remote. These days, remote work is not only possible, and in some cases practically necessary, it’s downright fashionable. Buying or leasing an office can be an enormous expense that impacts your bottom line, and it’s not something you truly need. If you go fully remote, you can instantly save thousands of dollars each month.
Saving money isn’t the only advantage of going fully remote, either.
Adopting a fully remote model means you’ll be able to hire people all over the world, greatly increasing your potential talent pool. It also means your employees will (in many cases) benefit form higher morale and higher productivity. Team management, collaboration, and communication can be more challenging, but these are becoming easier as our work norms shift.
Minimize the Team
Too many startup entrepreneurs get excited about the prospect of growing the business as quickly as possible, so they move to hire a full team of people immediately. They imagine the team they might need in a year or two and try to build it out immediately.
Employees are Your Largest Investment
Employees are going to be one of your biggest expenses, so this is a financially unsound move. Instead, it’s better to hire only the people who are absolutely necessary to get the job done. Only hire new people when you truly need them.
Additionally, it’s a good idea to hire people based on their talent and their passion, and not necessarily their experience. Someone with 20 years of experience in the industry may seem like a great fit for growing your organization, but they’re also going to demand a high salary.
By contrast, someone fresh out of college will be much less expensive — and they may still have the skills and energy necessary to bring life to your organization. I’ve found the best way to cut through what is best in a startup — is to ask your business friends some questions and talk this move through with someone. Sometimes your excitement can make you overcome good sense.
Keep Your Day Job (If You Can)
It’s an attractive idea to quit your day job and pivot to working full-time on your startup idea. And in many cases, this works out fine. But if you can manage to continue working your current job while moonlighting as a startup entrepreneur, try to do it.
You’ll have a reliable stream of income on which you can depend, helping you fund other aspects of your business.
Your employees probably don’t need the absolute latest models in computers, smartphones, and other technology. Buying used can immediately save you a significant sum of money on your equipment purchases — oftentimes with no significant drop in quality or performance.
Just be sure to review the condition of these products carefully to verify that you’re getting a good deal.
Barter With Other Entrepreneurs
Entrepreneurs tend to admire and support other entrepreneurs. Starting a business is hard work, and it takes a special type of person to go through this effort. Accordingly, if you ask another entrepreneur for help or a special deal, they may be willing to help you out.
For example, if you need to find a benefits provider for your employees, you may find a local entrepreneur who owns an employee benefits business. Rather than paying them directly for their services, you may help them out by giving them a beta version of your startup’s technology for free. It’s a win-win scenario that saves you money and helps you flesh out your professional network at the same time.
Additionally, don’t be afraid to negotiate. Sometimes, simply asking for a better deal is enough to help you get one.
Rely on Open Source Software
Enterprise software companies tend to charge a lot for their platforms – mostly because they can. But you don’t need to pay for a $5,000-per-month solution if you can find one for free that works just as well.
Open source software has a lot of advantages, the most notable being the fact that it’s typically free to use, even for commercial purposes. You’ll also get to tap into an extended community of supporters if you ever need help managing it or fixing a specific problem with the platform. Before committing to any software purchase, see if there’s an open source alternative that fits the bill.
Pay Attention to Discretionary Expenses
As a startup, you’ll have a lot of discretionary expenses — things that aren’t absolutely vital to the operation and growth of your company but are still worth considering purchasing. Review these expenses carefully. Do you really need this? Is there any viable alternative you could get for free, or for less money?
Outsourcing is one of your best options for long-term development. Rather than hiring someone new, you can pay for an agency or a freelancer to handle the work for you. This move is often less expensive than making a full-time hire, yet it still provides you with adequate support.
Outsourcing is also conducive to scaling; you can hire people for as much or as little as you need, which is perfect if your startup is in the midst of growth.
Tightly Manage Cash Flow
Cash flow is one of the most important financial considerations in a startup, dictating how much money you have coming in and how much money you have going out. Simple tactics, like delaying your outgoing payments as long as possible and following up on unpaid invoices, can help you ensure you have access to enough capital to keep your business growing.
Control Your Growth
Speaking of growth, keep a tight leash on your startup’s growth. Your long-term goal may be to scale enough to serve billions of people all around the world, but you’re not in a race to get there.
Many startups end up failing prematurely because they try to grow too quickly; they invest too much in new areas of the business that are underdeveloped or spend too much money on new hires and new equipment before they’re ready to manage them. It’s better to take your time and scale gradually, making confident and well-informed moves along the way.
These are some of the most effective and most important ways to save money as a young startup, but they aren’t the only ways. Think carefully about the cost-to-value ratio of every decision you make, and try to keep your expenses under control as you try to establish a firm foothold in your industry.
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