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5 useful tips to trim operating costs for startups

Posted by Tasnim Ahmed

August 18, 2022

The U.S. economy has shrunk for the consecutive second quarter, according to the Bureau of Economic Analysis, rekindling worries that a recession is looming. But no economist can predict the timing of the next recession or how long it will last, since forecasting business cycles is nearly impossible.

Complicating the matter is the Labor Department’s jobs report for July. U.S. employers added a whopping 528,000 new jobs during in July, indicating the jobs market has returned to pre-pandemic employment levels and leading some to ask, “what recession?”

Amid this economic uncertainty, startups are grappling with how to reduce their burn rate as expenses spiral and access to capital dwindles. And startups whose cash runway is too short run the risk of failing before they’ve even had a chance to fully understand their target market.

Running on razor-thin margins is a time-honored approach to navigating economic turmoil. Reducing expenses will lower your burn rate and in turn create a longer runway. But the act of trimming monthly operating expenses must be accomplished without impairing productivity or jeopardizing your startup’s ability to succeed, which is no small undertaking.

Where to begin? Seasoned entrepreneurs recommend focusing on the five strategies outlined below to reduce your startup’s expenses.

Tips for cutting your startup’s operating costs



1.  Rethink planned investments



As the gloomy economic outlook continues, the logical first step is to reconsider any significant purchases you had planned for the year. If you haven’t already done so, adjust your revenue figures in light of current economic conditions.

Before committing to a large investment or purchase, reassess the cost within the context of your updated revenue projections. For capital investments such as tools and equipment, consider what ROI you’re likely to see, and when.

2.  Reassess expenses



If there can be an upside to a down economy, it’s that it forces businesses to think about their spending decisions. Trimming the fat and focusing on the main sources of revenue is a good practice in any economy.

Start by eliminating any unnecessary business costs, such as redundant projects, underperforming business units, perks, unnecessary tools and the like.

Then direct your attention to whether you can renegotiate certain expenses. Perhaps your lease terms can be reworked. Maybe your startup doesn’t need a physical location any more, given the widespread adoption of tools enabling remote work. You could even join a coworking space, whose popularity is resurging and can cut your overhead.

You may also be able to negotiate a temporary discount or longer payment term with business vendors for things like software licenses, online subscriptions and professional services. For services you can no longer afford, you may be able to bargain your way out of early termination penalties.

3.  Revamp your operating budget



When you developed your startup’s annual budget, circumstances were probably very different. Since the economy has changed so much, it’s highly recommended that you review your budgeting strategy.

Consider how you expect the business to perform in the coming year and prioritize spending accordingly. For example, you may anticipate a slowdown in new business and decide to shift spending to customer retention efforts.

Before deciding whether to put marketing spend on the chopping block, be aware that digital marketing is apt to become cheaper as rivals cut back and demand drops. It’s important to maintain your website’s visibility on search engines to ensure it gets seen by customers.

4.  Review payroll



Payroll is typically a startup’s largest expense. If the economy is having a serious impact on your business, you may need to adjust your staffing plan. Cutbacks don’t necessarily equate with layoffs. For example, you could implement a hiring freeze to keep costs from rising.

Postponing (or eliminating) bonuses and lowering pay in lieu of layoffs are other ways to reduce payroll expenses. Just be sure to consider how a salary reduction or unexpectedly withdrawn bonus will affect employee morale and well-being beforehand.

HR experts advise that when it comes to salary reductions, employers should focus on those at the top who can most easily afford it. The smallest cuts should go to those at the bottom. In the event pay cuts are insufficient, you may be able to furlough some employees rather than laying them off.

In the event you need to dismiss employees, be sure to understand the layoff process to handle it in a supportive manner.

5.  Reconsider funding sources



The possibility of a recession poses an existential threat to many startups counting on VC funding, as most are tightening their belts and heavily scrutinizing certain KPIs in this bear market.

Founders may need to shift their focus to alternatives to VC funding, and that doesn’t necessarily mean opening a line of credit at the bank. In recent years, nontraditional lending firms outside the conventional banking area have sprung up to offer options such as offering revenue-based loans, which let businesses raise money in exchange for a share of future profits.

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