How to Decrease Your Monthly Burn
Some years ago I was working on a SalesForce contract. Our sales rep told me that we could get a lower cost per user if we committed to a three year contract. A lower cost per user sounded enticing, but a longer commitment made me hesitate. You see, SalesForce, like many other companies, prefers guaranteed revenue over the next couple of years versus more revenue today.
That makes sense for SalesForce. They can build out their Cash Flow and P&L projections with confidence: they have guaranteed revenue.
That also makes sense for mature businesses. Mature businesses, those that have been around for awhile, are typically seeing growth rates in the single digits. They know their business inside and out and can pretty accurately project how many employees they will have, how much revenue they will earn, etc. For a mature business, it makes sense to commit to a three year agreement with a 5% savings; they know they are going to get value from it.
No matter which way you look at it, there are only two ways for a startup to reduce its monthly burn: to spend less or to make more money. Here I am referring to proactive measures only. Obviously, if you want to cut your monthly burn you could just fire people. But let’s assume that we are planning for success rather than reacting to challenges.
Managing the budget of a startup is no small task. You probably have a lot of cash in the bank and pretty much free rein on how to spend it. With little or no cash coming in, it can be hard to create a budget. Let’s take a look at both of the ways you can reduce your burn and how you can start today.
To make sure we are all on the same page, let’s first define burn as below. There are a few different ways to define burn, but the net monthly burn after including the cash collected is the most useful in the beginning. You will need to create your own assumptions on the range of expenses and revenue.
Cash Collected - Cash Spent = Net Monthly Burn
1. Reduce Monthly Burn via Cost Savings.
What does this mean exactly? This means you spend on the things that you need, but find ways to spend less on them. Often times a startup will naturally come to this conclusion and start planning for cost savings eventually.
For example, when a starting out you may not have a lot of people willing to join your company. In order to get going you will have to hire the best people you can find. It’s hard to attract talent to an unknown venture. But as time goes on, the roles that you need will become clearer to you and so will the salary ranges for those roles. Then you can start prioritizing and planning.
So how does planning for cost savings work exactly? Whoever is in charge of the budget reviews all of the expenses and finds places where they can spend less. I mean literally, log in to Quickbooks / Freshbooks / Xero or whatever accounting software you are using and go expense by expense. Examples of places that a startup can spend less include the following. (Pro tip: Look for places where you can save thousands of dollars versus hundreds or less.)
- Salaries. Just a few options here are: tie raises and bonuses to company performance, increase variable pay, hire less experienced talent, hire contractors for noncritical roles, push out raises to a later date or grant more equity.
- Buy cheaper office supplies. Here you can search for cheaper vendors or alternative products. The sexiest startups all offer at the very least free snacks and drinks to employees and many offer meals. There are many different vendors and options here for how you can decrease this cost while still providing great perks to employees. For example, having a fixed lunch days every week working with one provider will enable you to get a better price, rather than ordering from a restaurant or caterer.
- Lease equipment. Many suppliers lease office equipment like laptops, printers, etc. Leasing offers a cheaper upfront cost for short term use (one to two years).
- Real Estate. Set up your office in an alternative neighborhood (although this may be cool to go off on your own). This is obvious, real estate in less sought after neighborhoods equals cheaper rent.
- Get discounts. Here you can reach out to your current vendors and see what kind of deals they have. Typically, like with SalesForce, you can get a discount with a larger commitment.
- Ask. Don’t be too shy to ask if there are any discounts available or how you could get a better price. Remember it is not the hungriest bird that gets the worm, but the loudest.
Why is it a good idea to focus on cost savings for a startup to reduce its monthly burn? You can spend less money today, which buys you more time to execute your plan.
The challenge with trying to reduce your burn with cost savings is that some things just will not work for you. You need to be very thoughtful about what you choose to save on: really consider both the advantages and disadvantages.
For example, hiring less experienced people is cheaper today. But with the time and money it takes to for you to train them, you may not actually save anything. I have seen a lot of startups make experienced hires for critical positions and train more junior people for other positions. It seems to work well this way.
Also, getting a cheaper price on for a three year commitment to a vendor makes your Balance Sheet ugly. Who wants to have a lot of prepaid expenses in a startup? Investors do not want to invest that you can secure a good price on a booth at a conference 3 years from now; VC’s want to invest to help you grow your business as fast as possible. Make sense?
Ultimately, it really depends on what stage you are in your business where you can cut costs. An early stage tech startup can usually save, for example, by not hiring a CFO if they have very little revenue but will likely want to spend on talented developers to build a good foundation for the product.
2) Reduce Monthly Burn by Increasing Revenue.
I’m sure for many of you your initial reaction to is “ha!”. If you knew how to increase your revenue any faster you would probably be doing it.
But let’s be serious. Hear me out. If you can focus on short term revenue generating expenses, you will be rewarded with time.
Short term revenue generating expenses are small investments in quick wins that help you to get cash in the bank today. These short term revenue generating expenses are probably not scalable and you will likely phase them out in the future. They can also be a little trickier to come up with because every company is different and what works for one may be a disaster for another. One example I can give to you is when I worked in ad tech.
I worked at an ad network* about 10 years ago and they leveraged investing in short term revenue generating expenses. In the beginning the ad network didn’t have a lot of leverage to sign up partner websites or get advertiser clients. No one knew who they were: big advertisers had no reason to buy from them and major websites had no reason to partner with them. So, they started out by hiring a team of salespeople to create partnerships with websites in the long tail. The long tail websites helped them to get small advertisers, while building the network. Over time, they were able to get larger and higher quality websites as partners, and in turn larger advertisers.
This short term revenue generating expense helped the ad network to A) get cash in the bank today (short term need) and B) build up their reputation (long term need).
What ways can you start to reduce your monthly burn today?
*An ad network is a company that creates partnerships with thousands of websites to places ads on their site. The ad network groups the sites by category and then sells the category of websites to advertisers. For example, Apple wants to advertise its new iPhone to the tech community. The ad network sells them ad space in their tech category and places ads on sites that techies visit.