How smart cost-cutting can accelerate your startup growth
Lessons from a cheap-ass entrepreneur who grew from $3K to $20M in five years
My jaw dropped when I read the total: $3,000. That’s exactly how much money we used to start our company.
I shot a DM over to my co-founder, Mark. “Get this. Funny typo in P&L statement for Gurgaon.”
He replied right away. “Where?”
“Line 29. Cleaning. Says we spent $3K last month on toilet paper!!”
Mark sent back the laugh-crying emoji. “Ha! For 14 people.”
I highlighted the cell and continued my review. A few minutes later, Mark sent another DM.
“Talked to Tejas. Not a typo. They hired a new delivery service three months ago. Must have gotten buried in the invoice.”
We had inadvertently spent several thousand dollars stocking our Indian office with enough toilet paper to last a decade.
It’s a funny anecdote, but most importantly, it shows the importance of keeping a sharp eye on your expenses.
Ever since Mark and I launched Appster in 2011, we’ve been fanatical about cost management.
Sure, we’re naturally frugal, but I also believe that knowing your numbers and watching the details (like toilet paper) can mean the difference between success and bankruptcy.
We’ve definitely made a lot of mistakes over the years, but here’s what I’ve learned about managing costs — whether you’re a tiny startup or a fast-growing company.
Start lean and stay focused on the future
I’ve already shared how Mark and I rented a ridiculously expensive office in Melbourne’s Rialto Towers before we started our business.
We thought that the huge monthly expense would be motivational; it would light the fire we needed to flourish.
Once we realized that this was a dumb strategy, we downgraded to a bare-bones space in an old distillery tower.
It was freezing in the winter, blazing hot in the summer and, at times, tested our resolve (and our friendship).
But it was a smart move. We lived in that office and invested our early profits right back into the business.
We didn’t draw a salary from our young company, either. We survived on fast food, shared one nasty bathroom, and we didn’t even have a vacuum cleaner.
It wasn’t always fun, but we knew it was the best way to grow and scale our services.
I do realize that not everyone can live at their office or flirt with scurvy after eating microwave burritos for two weeks straight. Our story is a bit extreme.
Everyone can, however, cut expenses to the bone. I encourage every founder and business owner to slash and burn material costs.
What can you eliminate? What can you live without — even for now?
Challenge yourself to get lean and creative, and you’ll reap the benefits of reinvesting in your business.
Delay full-time hires until it’s essential
Contracting administrative staff in the Philippines was another strategy we used to fuel our early growth. Working with less expensive talent for tasks like research, email writing, and developing our sales process allowed us to focus on landing new projects.
I know some people don’t believe in overseas contracting because it sends jobs offshore. There’s animosity and controversy. I get it.
But by creating a business structure that enabled us to scale without raising outside capital, we now employ over 400 people in Australia, the U.S. and India.
We wanted to bootstrap our company — and that meant we had to be creative about managing costs. Our growing, global team now reaps the rewards of those early choices.
By 2012, we were starting to win some great projects, but we still hadn’t hired our own development team. We continued to contract the work and hire freelance coders on an as-needed basis. We also partnered with some offshore firms. It kept overhead low.
As we started to scale the company, we realized that we wanted to maintain full control over the products we were building for our clients.
We wanted to be super competitive in a growing market, while still producing top-quality work.
That’s when we decided to build an offshore delivery centre in Gurgaon, India. The process had some major ups and downs, but it’s a core part of our success today.
Create a culture that believe in frugality
I live in San Francisco and work in tech, so I’ve seen the industry’s excess and over-the-top perks firsthand.
We’re talking on-site massages every Thursday. Unlimited blueberries. Craft beer flowing like water from the taps.
In contrast, we treat our staff well and reward exceptional performance. We grant options to people who deserve them.
We do everything in our power to ensure we have happy, productive teams that are passionate about what they do.
Most importantly, our employees know that a profitable company will not go dark without warning. We will continue to pay their salaries. I think that’s far more valuable than a pint of organic blueberries, and I know our team agrees.
We’ve intentionally built a culture that celebrates frugality — and we maintain it in two key ways:
1. We lead by example.
Mark and I don’t fly business class. We don’t own cars. We have competitions to see who can find the cheapest Airbnb when we travel for work.
Many people are surprised to learn that we’re not the highest paid employees in our company — even though we’re the founders and technically, the “bosses.”
We always try to walk our talk, and that doesn’t go unnoticed. At the same time, our self-described tightwad status is not a stunt. We’d try to out-cheap each other even if no one was watching.
Managing unnecessary costs just makes sense, and we don’t need to stroke our egos by staying at The Ritz.
Here’s the truth that has served us well: Cash is the oxygen of your business. You can’t survive without it — and you never know when the market will hit a downturn.
Ultimately, managing your cash flow gives you power. It fuels new possibilities for your company, and prevents you from having to fire employees who once enjoyed those on-site massages.
2. We empower employees and give them ownership
After the toilet paper incident, we realized that we needed to be fastidious about our P&L (Profit & Loss) statements.
So, we decided to make individual employees responsible for single line items. For example, a creative or administrative staff member might be in charge of the office electricity bill or the stationery budget.
In another flashback to India, we recently discovered that we were spending thousands of dollars every month on whiteboard markers and cleaner.
We hold a lot of workshops! But, we might not have spotted this overblown expense without the help of a keen-eyed employee who was watching the stationery numbers.
We started bulk buying and cut at least $1,000 from the monthly budget.
If you’re thinking, “Dude, I have better things to worry about than the price of pens,” I get it. Starting a business (of any size) is hard. There’s so much to juggle that it’s easy to let the little things slip.
Once you get even a bit bigger, though, costs can quickly balloon out of control.
Spending an extra $1K on markers won’t sink the company, but multiply that times 100 more line items and you can quickly find yourself on the red side of profitable.
When employees understand why you’re so frugal, they can align with the mission.
You’re not barking down orders; you’re empowering people to help build a company that can do amazing things — now and for many years to come.
Yeah, there might be some office marker drama and bitching about who left without turning off the lights, but the overall effect is positive. We see the positive results almost every day.
Spend on sales and marketing efforts that actually work
Talking about bootstrapping, cost management, and marketing in the same breath might seem counter-intuitive. After all, marketing is a sunk cost, right?
Isn’t it something you just spend on and wait for the results to roll in?
Yes and no.
I believe sales and marketing is a prime place to trim expenses. It’s all about learning what’s working for you — and to what extent.
For example, imagine you’ve bought cost-per-click ads to drive website traffic and lead visitors into your sales funnel. Do you know the exact ROI for each keyword, marketing channel and individual campaign?
If not, it’s impossible to know whether you’re spending those hard-earned dollars effectively.
I realize that “optimizing your sales and marketing efforts” can sound like generic, common-sense advice, but most companies don’t actually do it. They don’t measure the return on their marketing investments.
I’ve always wanted to understand exactly where our money came from, so we started small and figured out the basics.
Over time, we built a smart team that plans and executes our marketing on a channel by channel basis. They also create weekly, monthly and quarterly reports that we use to continually shift and enhance our spending.
All this number-crunching eliminates a ton of waste. Today, we have sophisticated models and process in place to calculate the cost per lead, per opportunity, and the price tag of closing a single deal.
We know the benchmarks a campaign needs to hit in order to break even, or to generate a nice profit.
Having this kind of granular detail helps us to make better business decisions.
Forecast the future — as precisely as possible
Speaking of good decisions, we decided early on that we needed a world-class CFO. We recruited him almost before we were ready, but we’re still grateful to have an experienced leader who has now built a killer finance team.
We’re also pretty intense about forecasting. It’s another strategy that many founders overlook, especially in the early days.
But remember — you can and should start small.
Create a basic forecast sheet that lists your weekly or monthly sales and expenses. It’s okay if you’re making educated guesses. At the end of the day, that’s what “forecasting” means anyway. Getting started is what matters.
Break down your numbers and watch the trends. You’ll soon have a better understanding of both income and expenses. Patterns will emerge. Eventually, you can use software to run digital models and do more sophisticated calculations.
You can also reverse engineer the numbers, to the point where you know that if you get X visitors to your website and increase that number by 5%, month over month, you should be able to grow annual revenues by $X.
Forecasting isn’t foolproof, but it’s incredibly helpful. Get a good process in place and build on it as you grow.
Knowledge is power, not a burden
I bet you’ve talked to other entrepreneurs who don’t want to look at detailed P&L numbers — or who claim they don’t have time. I know I have, and this always makes me roll my eyes.
If you don’t care enough to dig in and review what’s going on, then what are you actually doing with your business?
Thanks to my team, I know within 80–90% accuracy what targets we need to reach and where our expenses should be, each and every month. It helps me to sleep well at night.
If you’re not financially savvy, consider bringing in a co-founder who can oversee this part of the business, or find an experienced accountant who you trust.
Eventually, you can build a financial team who will equip you with all the information you need.
I also believe that creativity thrives under constraints, If you know that sales usually dip in December, for example, you can find new ways to bring in extra business that month.
Maybe you accelerate sales efforts in October and November or run a time-sensitive marketing campaign. Knowing what to expect makes you more flexible and adaptable. That’s an advantage, not a drag.
Don’t forget about earning more $$
Entrepreneurs often talk about bootstrapping in an obsessively cost-cutting, money-saving context. I’m guilty of this sometimes, for sure. But growing your company fast and staying lean means that you need to get better at making money, too.
How? It comes back to the sales and marketing team.
Whether you’re a solopreneur or a growing startup, are you saying the right things to your customers?
Is your product positioned effectively? Is your sales team well-trained, and do they have strong scripts and resources?
For companies growing from 0 to $1 million in annual revenues, I would be dogged about sales and marketing. You can build the world’s most innovative product or service, but if no one knows about it (and you can’t articulate the value), then you’re not going to make it.
I’ve harped on for a while now about managing numbers, cutting costs and tracking patterns. Boil it all down, though, and we’re really talking about optimization.
Your goal is to get a clear, ongoing view of what’s happening under the hood of your business, then figure out smart ways to make it work better. Run more efficiently. Use less financial fuel to go further, faster.
Set up systems, cycles and schedules
Okay, so the goal is to optimize your entire business. No big deal, right? Hardly.
I know it can be easy to feel overwhelmed. There’s so much to do and so many details vying for your attention. The solution lies in two boring, but effective words: Rhythm and discipline.
- Rhythm — create predictable review cycles for the P&Ls, forecasting sheets, sales and marketing reports, and any other measurements you put in place. From annual planning sessions to monthly, weekly and daily reviews, create a schedule. When the time is blocked off in your calendar, it’s easier to juggle those review times with other responsibilities.
- Discipline — once the schedule is set, stick to it. Be intense about tracking and monitoring your most critical numbers. Delegate line items that don’t require your individual attention and then review the reports. Be consistent.
Create a consistent, repeatable rhythm as you manage expenses and optimize sales. Keep it going.
If I’ve learned anything from the last several years of ups, downs, and over-spending on sticky notes, it’s that discipline creates freedom.
It frees up your time to focus, be more creative, and build a really, really awesome business — one line at a time.
Originally published at www.appsterhq.com.
Thanks for reading!