Subscribe or Lease?
How startups should stop wasting their money on it and start using co-working spaces and flexible work arrangements
For a standard professional or technical services company, rent is often the 2nd highest line item after salaries.
The standard metric for evaluating your rental expenses is the ‘rent-to-sales’ ratio. For a professional or technical services company such as a law firm, the recommended ratio is 5% to 10% of sales. Add in leasehold improvements and furniture, and this number starts creeping up to 12% of sales.
So is this rent-to-sales ratio still relevant?
Should startups and small business use their hard earned (or raised) cash for commercial real estate? Not necessarily…
In our work from anywhere world, that ratio seems high, and quite frankly, a hindrance to growth. This is especially true for early stage companies. It also assumes that companies already have a sales pipeline.
For many startups, revenue is a bit further down the road.
The most important thing for startups (after good products and people) is cashflow.
Why tie it up in long-term rental agreements?
If you could save money on rent and invest it back into the company be it for another developer or designer, which do you think is better?
On top of the high cost of commercial real estate, is it wise for a start up to sign a 5 year lease? What if you grow, what if you shrink? Startups need flexibility. They need to be agile. The juice is not worth the squeeze in many cases for small business if you ask me.
No office you say? So where do you work?
Good question. The answer is coworking and flexible work arrangements.
The emergence of coworking locations allows businesses to ‘rent’ spaces in a shared working environment for a fraction of the cost of a commercial lease. Coworking allows for maximum flexibility and affordability, especially for early stage companies. Desks or offices can be rented by the day, week, month or even by the hour.
Another option is flexible working. With the emergence of cloud computing, video conferencing and virtual reality flexible working is as easy as ever. Why should your colleague commute 1 hour to work when they are more productive and happier at home or your local coffee shop?
So which one should I chose?
I call this the hybrid approach. By combining coworking and flexible work arrangements, startups can really get the best of both worlds. Imagine working from home 3 days a week, and working at a coworking space 2 days a week?
Savings money on commercial rent and productive happy employees! What’s not to like?