In the world of business, increasing profits is goal number one. However, coming in at a close second is managing costs, and there’s no time when it’s more important to control costs than during the early stages of building a business. Setting the standard cost estimation model for your small business in its early days will provide a foundation for what your business will become as it matures. If you allow for bloated or unnecessary expense items to routinely make their way into your budget, your business won’t stand a chance when the going gets rough.
In fact, it’s not a bad idea to learn how to manage the costs of starting a business even before learning how to increase its revenues. Why? Because scaling a business that is expensive to run is much more difficult than scaling a business that is lean, cost-conscious, and disciplined in its spending. One of the first things investors look at when evaluating a business for its performance potential is recurring debt payments and monthly costs of doing business. There’s a reason: out-of-control costs are toxic to business growth.
So, if you’re interested in generating maximum profits through the strategic management of costs for your new or potentially new startup, read on.
Time to Get Real
A common mistake among many who endeavor to start a business is not having a clear idea of what their expenses are going to be once sales start being made. Ask yourself before you even get started if you have a solid, educated idea about what your expenses will be. And, don’t stop with just the obvious costs like payroll or permitting costs. Include as much as possible, and leave no stone unturned.
When developing the cost model for your new business, don’t neglect the areas of:
- Employment taxes
- Equipment lease payments
- Debt repayments
- Research and development expenses
- Advertising and promotional activities
- Insurance premiums
- Bad debt or written-off accounts
- Changes in supplier pricing, or increases in materials costs
- Employee turnover
When it comes to having a smart plan for handling costs within your new business venture, an ounce of prevention truly is worth a pound of cure. By getting in front of potential expenses and accounting for them early on in the life of the business, you’ll be that much more prepared to pivot and adapt in the future. And, as anyone who’s ever run a successful business will tell you, the future of your company will hinge on its ability to deal with constant change.
Consolidation, Negotiation, and Variation
There’s a reason why you can typically save money if you buy multiple services from the same company – like getting your cable TV and internet service from a single provider. This kind of cost consolidation can be applied to a fledgling business, too. Any time you can source multiple necessary products or services from a single provider, you’re going to end up saving on costs.
This next tip might seem like it should go without saying, but you’d be surprised to learn how few startups have negotiation as a focus for management of cost. Smart, confident negotiating can save you on everything from your business loan interest rate to the cost of the light bulbs used in your facilities. Negotiation of operating costs becomes progressively more important as small businesses scale into a growth curve, often qualifying them for pricing discounts as volumes increase. So, it’s critical to review the pricing terms and contractual obligations at least quarterly, just to be sure you’re not leaving any money on the table.
Don’t forget that when it comes to choosing fixed costs versus variable ones, remember that it’s almost always preferable to opt for variable. The reason isn’t what you might think – the goal with choosing variable costs over fixed isn’t necessarily to save as much as possible on monthly costs. Rather, variable costs can be modified up and down as needed, which is much more conducive to the ebb and flow of business. This cost adaptability has a value that you can’t put into dollars and cents.
Make Good Use of Loss Leaders
A loss leader is any product or service that is sold as a loss to the company, with the sale being viewed as a ‘lead’ into future business that will be profitable. Loss leader products are often strategically developed for the sole purpose of entering a new market or penetrating a highly saturated one.
But, what many small businesses fail to do once they’ve established themselves as inexpensive is suddenly make the product profitable. This has spelled doom for many a company, which is why it’s of utmost importance to have a plan for loss leader products or services, should you choose to use them to grow your sales.
As your startup business grows, a time will come when you will realize that you can’t do it all yourself, and that you need to hire your first employee. Don’t make the mistake of thinking that you need to rush out and hire a full-time, salaried worker. Keep in mind that in today’s internet-assisted age, finding and collaborating with remote employees on a contract basis is very easily done. Platforms like Upwork and Freelancer.com make it simple to find talent in whatever discipline you may be needing, from accounting to computer programming and everything in between.
Another tip for finding great human resource during the early phase of your business is this: develop an internship program. This is an especially good idea for companies operating in highly technical industries or business verticals, as many younger workers are thirsting for their first ‘foot in the door’ job opportunity. Internships can be paid or unpaid, and you can even negotiate a hiring proposition if the worker seems like a good fit for your organization.
Tying it All Together
You’ll be maximizing your chances of success in business if you’re able to keep a handle on your costs at every turn. By applying the techniques listed here, you’ll be doing more than the average startup does to keep costs low, giving you an edge that might end up being just what you need to really take off.
So, to recap: consolidate, negotiate, keep costs variable wherever possible, hire creatively, and if you’re going to lose money, lose it for a good reason. Good luck; here’s to higher profits!
Kevin Conner is the founder of Vast Bridges, a lead generation and customer acquisition firm focused on helping companies grow. In his role, Kevin gets to follow his passion of developing and implementing a strategic business for different companies, including www.broadbandsearch.net, a broadband and TV search engine.