5 Steps to Stop Spending Yourself Out of Survival

Written by Brent Freeman // Also shared on Startups.co.

TL;DR: For early-stage founders, guiding a business to the next level comes down to being disciplined enough to steadfastly — and smartly — stick to that predetermined budget.

Want a glimpse into the psyche of a startup founder? A recent survey found that roughly 25 percent of early-stage founders believe that if their businesses fail, it’ll be because of one factor: no cash flow.

That suspicion isn’t unfounded, either. More than 50 percent of small businesses fail within the first four years, mostly due to cash flow problems. Entrepreneurs aren’t just irrationally afraid their funding will dry up — they’re seeing it affect colleagues in droves.

Look, ideas are great, right? They are business in its purest form, unsullied by compromise, unnecessary input, or cynicism. But they need lots of things — chief among them money — to prosper. Funding keeps the dream alive, and budgeting that seed money can be the key to helping that pure idea blossom into everything you want it to be.

I’ve worked with entrepreneurs and have been one myself for more than a decade, but there’s one lesson that even the most nascent business owner knows: The economics of starting a business can get complicated quickly. But once you understand your cash requirements, you can confidently take the leap and turn your big idea into something viable — without breaking the bank.

KEEP PACE

The best surprise is no surprise. You’ll want to map out your business in as much detail as possible, thoroughly uncovering all revenue streams and costs to produce a forward-looking cash flow statement and balance sheet. A good plan will be comprehensive and strike the right balance between optimism and pessimism.

The more research you do, the more prepared you’ll be when, invariably, something changes that positively or negatively affects your cash requirements. A good business model includes estimates of how much money you’ll need at various stages and helps you avoid land mines, especially if you keep it updated with current market realities. If you’ve already started a business but have never undertaken this exercise, don’t wait.

Unsecured money is harder to raise, and investors will be interested in opportunities for which the risk has been mitigated. Convert as many unknowns into knowns as quickly as possible with real-world representative data. After developing your business model, create a working prototype or minimum viable product to confirm product-market fit and knock down a few barriers in the process.

STAY AFLOAT

The availability of cash and the level of operational risk will have a dramatic impact on every level of your business, whether it’s an everyday task or a long-term prospect. Don’t spend yourself out of startup survival. Try these cost-cutting practices to keep your small business above the surface:

1. Figure out funding choices.

Once you’ve established solvency, know that timing is everything. Friends, family, crowdfunding, angel investors, and venture capital are just a few means founders use to raise dough; knowing when and how much of an investment you’ll need is key to doing it successfully.

Your ability to raise funds when you need them will be dependent on risk versus market opportunity. When you secure an investment against an asset, there is obviously less risk for the investor.

Properly explore all scenarios — positive and negative — and set clear KPIs within your model. This keeps you ahead of your cash without needing investors, which improves your leverage when it comes time to raise money.

2. Look outside.

A study finds that by using contractors, employers can cut costs by 30 percent; this practice helps avoid expenses such as benefits, payroll tax, and vacation time, and it’s much easier to scale or scale back the amount of time contractors work.

Hiring contractors provides flexibility that you lose by committing to a full-time team member. New hires also require time to develop their talents and probably won’t add value until they’ve been around for six months or more. Contractors, on the other hand, will be experts in their niches and can get to work right away.

3. Offer something extra.

Wanting to decorate Facebook’s walls in its fiscally tight early days, Mark Zuckerberg asked muralist David Choe to work on good faith. Instead of traditional salary, Zuckerberg offered Choe equity in the company, which he was free to cash at any time. In 2012, Choe did just that — for $200 million.

Though Choe wasn’t a full-time worker at Facebook, this is a strategy that startup founders shouldn’t dismiss. Having team members on an equity plan is a great way to preserve cash on payroll and share the upside. This is essentially the same as somebody making an investment into the company for cash, but instead employees are investing in the form of a decrease in salary.

4. Listen to the market.

As big a proponent as I am for having and sticking to a plan, the market couldn’t care less about that when it’s ready to move elsewhere. I started a business called Roozt.com, which aimed to become the Amazon for socially conscious brands looking to sell their wares.

As we built the platform, our yoga vertical’s growth became noteworthy and accounted for 90 percent of all revenue, so much so that we were approached about dealing exclusively in the yoga industry. After talking it out, my investors and I declined to go exclusive on yoga because that was not the original plan of the business. Needless to say, Roozt didn’t become what we wanted it to be, and not pivoting was a big factor in our having to sell the company prematurely.

Based on the money you raised, change your pro forma projections (projected cash flow) and growth to fit this financing. With a new strategy, you may find a quicker way to profitability, which many businesses today undervalue.

5. Do more with less.

Read this number: Startups that share a co-working space are four times more likely to succeed than those that don’t.

If money is tight, look at your office rent expense. Reducing it can involve moving or downsizing, or evening adopting a virtual office or shared space. The latter not only reduces operating costs, but it also helps you interact with other small business owners and employees with various talents and specialties. Remote work, which is another option, affords a business tax deductions if part of that home is primarily for running a business.

Even if you have a detailed financial business model and have an eye toward reducing costs when possible, it’s important to have a solid plan B. Some planning against negative scenarios goes a long way in mentally preparing yourself before you’re forced to face the circumstances head on. Options typically include boosting revenue at a lesser margin, followed by various degrees of cost-cutting, and finally doomsday planning to pivot, sell, or liquidate.

The more time you put into creating a comprehensive business model, the easier it will be to react and adjust your course as needed. Moreover, moving quickly and decisively with a well-thought-out plan B could make all the difference in your eventual business success.

Every day we share the TL;DR version of everything interesting happening in the startup world in the Startups Daily Newsletter. Sign up here to get future issues.

Got an interesting story? Awesome. Send it our way!

If you dig our stuff, please hit that little ♥ to spread the word.