Note: This is a guest blog post authored by Alex Carter, Director of Marketing at Decimal.
Did you know up to 70% of startups fail between two to five years? The leading cause of failure for many startups is, quite simply, running out of funds. However, you can significantly increase your startup’s chance of survival by undergoing effective expense management. This practice helps startups navigate typical financial challenges, seize growth opportunities, and establish a strong financial foundation.
Here, we'll break down the key strategies to ensure efficient cost control for your startup — and how to get started.
Managing startup expenses means knowing the different costs affecting your finances and growth, including fixed and variable costs and one-time and repeat expenses. Understanding these financial aspects enables you to craft a well-informed financial strategy supporting short-term stability and long-term success.
When it comes to startup expenses, you have fixed costs and variable costs. Fixed costs remain constant regardless of the business's output or sales volume. These often include items like insurance premiums and salaries for essential personnel. On the other hand, variable costs fluctuate in direct proportion to production or sales levels. These could be made up of raw materials, packaging, and shipping expenses.
Next up, we have one-time versus recurring expenses. One-time expenses come up irregularly, often when you're just starting. Think about situations like getting the business legally set up or buying your first equipment. Recurring expenses are the ones you'll pay regularly and examples include monthly rent, utilities, or subscription fees for software services.
For startups trying to manage their money smartly, it's essential to tell apart the must-haves from the nice-to-haves. Must-haves, also called essential spending, are critical for daily operations and value creation. This covers inventory, production costs, and admin expenses like office supplies. Discretionary spending, on the other hand, encompasses non-essential items that enhance the business but aren't absolutely necessary, like employee perks or aesthetic office upgrades.
Now, let’s explore the ‘why’ behind cost control. In a highly competitive business environment, startups practicing smart cost control are well-prepared to overcome challenges and grab opportunities.
Ineffective management of expenses results in those pesky cash flow issues, which are crucial for covering daily operations, bills, and staff salaries.
However, startups that manage expenses well enhance their odds of constructing a lasting business model. In the long term, this means they can weather economic downturns and market fluctuations more skillfully.
You might have heard of the dreaded "valley of death" period for startups. This phase refers to when a startup gets its first bit of cash (usually from friends, family or angel investors) and starts making enough money or getting bigger funding from venture capitalists. During this phase, startups often struggle to bridge the gap between their early-stage funding and reaching a point of self-sustainability.
So, here’s how to navigate the “Valley of Death” phase:
Your expenses will naturally increase as your startup grows over time. Managing these costs early sets the stage for responsible growth, preventing overspending as the business expands. This not only provides a financial safety net but allows you to make necessary adjustments.
A strong financial foundation also attracts two of the most important things in business: customers and employees. It reinforces customer trust through a clear value proposition, reliable operations and a commitment to quality. Moreover, a solid foundation attracts skilled professionals seeking stability and growth opportunities.
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