A practical guide to auditing your costs and making your company more nimble and ready for the future
If you’re a founder like me, you are really starting to feel the effects of what was warned in Sequoia’s Black Swan of 2020 post last week. Conferences are cancelled, meetings postponed, travel banned…even America’s Favorite Dad (Tom Hanks) has COVID-19! Stuff got real. Hopefully by now, you’ve taken time to settle yourself and your team into a new and better WFH routine, which begs the question: What next?
I was a banker in restructuring and bankruptcy in the early 2000s and a strategy/finance executive in the late 2000s. I have had to rightsize costs and capital structures in many companies, and I have seen all the ways that smart management successfully steered their companies through tough stretches. The advice from the Black Swan article is very prudent for now. Whether or not the predictions come true, by questioning every assumption for your business and preparing, you will be better off no matter what happens.
But what exactly are you supposed to do?
Generally, there are two categories of actions you take — proactive and reactive. You may be faced with a situation where you have to react to as quickly and as strategically as possible. For example, a large reactive measure would be to negotiate your bank covenants after you busted them. You do reactive measures because you have to and oftentimes, you are simply scrambling for solutions.
Being smart and implementing proactive measures, whether large or small, can help you avoid and/or alleviate any potential future situations that you have to react to. So let’s focus on two small proactive measures you can do right now. The goal is not to cut costs that you need or hamper the growth you can have, even in this volatile environment. What we want is to come out of this smarter and more aware, knowing that you have set your company up to be lean, flexible, and ready to withstand (and thrive!) no matter the environment.
1. Question every vendor spend
First, have your accounting team give you the detailed monthly spend, broken out by every vendor. It should be very detailed and inclusive of even the smallest items you auto-pay by credit card.
What you’ll find is that the list is WAY longer than you thought. There will be things you forgot you pay for, and the total amount will be more than you predicted.
Next, go through the process to justify each and every vendor spend. That is, ask yourself (and the teammate that is the vendor point person) the following types of questions for each item:
- Do you need this vendor to run your business? What happens if I don’t have it?
- What are the alternatives to this vendor? Is it as good? How much cheaper can I get? What are the switching costs for us?
Once you’ve done that, cut the vendors that you don’t need.
Now that you have your “justified” list of vendors, re-visit each pricing structure and contract terms. Ideally you’ll do it for each item left but, at a minimum, do it with all of the bigger ticket items.
Now, ask yourself:
- What’s the minimum we need from each vendor that doesn’t hamper our business? (i.e. do all 28 users on Jira actually need access? What is the designer working on every month and who’s keeping tabs on that budget?)
- Is there flexibility on the costs from these vendors? If so, call and negotiate the terms. The goal is to get the costs lower and keep the terms flexible. You want everything to be on monthly plans or pay as you go.
It may seem unnecessary and crazy to spend your precious hours to think about these $100/month vendor costs, but I can assure you, these small costs add up. But more importantly, the discipline for thinking through even the smallest costs now will translate to your company being smarter and more efficient later when it comes to your bigger ticket items.
2. Question every payroll cost
(First things first — this is going to sound cold and cutthroat because we’re going to talk about your employees similar to the way we just talked about your vendors. Just remember that the only way you’ll have any employees to worry about is to have a thriving company in the first place.)
So, yes, you guessed the next steps. Get the spreadsheet of your employees and their costs. Don’t just look at their salaries, although that will be a big part of it. Look at it as a fully-loaded costs with benefits, payroll taxes, etc.
Add to that list all of the open positions you have, too:
Next, ask yourself (or talk to each manager and ask these questions):
- What does this employee do? What is his/her day-to-day?
- What happens if he/she is not here?
To be clear: I’m not advocating you go and cut your employees right now. This is a thought exercise you should do so you can make any appropriate changes, if any.
Let’s take it even one step further. It’s probably easier to do this with an open position than a current one, but think about unbundling that job/role into projects. For each project you need for your business, ask yourself:
- How critical is this project? Who can do this best? Is this a full-time role? A contractor role? A vendor project?
- What would it cost to replace this job with on-demand vendors just to get what I need done now without long term commitment?
Again, I’m not saying your employees are not important. They are critical to your business. But in times like this, you have to stay creative with a certain prudent mindset. Think about a fully loaded cost of a five employee development team. For the same cost, can you get away with two full-time core employees and 10 remote developers? Or how about one full-time and one dev shop that can do just as much? You want cost-savings but flexibility, too.
Most of us are currently building businesses where a more liquid workforce is available. So, tap all resources that are available to you and keep your business lean and nimble. If the idea of managing an even bigger vendor set overwhelms you, talk to us at Liquid and we’ll help you get set up. No matter what, prep work during times like this will make you feel stronger than ever to scale quickly when things start to boom again.
You got this!
At Liquid, we reimagine traditional HR and finance software solutions for the liquid workforce. We provide an all-in-one platform that allow companies to streamline the way they onboard, manage, and pay their freelancers, contractors, and professional service vendors. We are @ Twitter | Facebook | Email.