Ask any experienced entrepreneur who's been through the startup ringer what the most basic formula for a successful startup company is, and they will likely give you this response:
-Revenue minus expense equals profit-
This may sound like an overwhelmingly obvious point, but you'd be surprised how many startups screw up this formula from the start. And you may be one of them.
While no startup succeeds without revenue, plenty of startups fail because they can't manage expenses. Experienced entrepreneurs know that in order to keep the ship afloat, you need to reduce as much weight as possible. This means shaving every possible expense you can find â€“ even the ones you thought any startup should have.
When I help companies review their business plans, there are three areas that consistently waste the most capital. They're the biggest obstacles to getting to the profit part of the equation. Let's take a look at the biggest offenders.
Ditch the Office Space
The premature office space lease is the single worst expenditure you can make. The thinking goes that if you have a place to work from everyone will be more productive and you'll look more like a real business. It's true, you will definitely be more productive in a shared space and you will look more professional.
But at what cost?
Office space is never cheap, and the overall benefit rarely outweighs the associated cost. The lease alone is rarely the largest cost, since once you move in you will need extra phone lines, office furniture and services just to maintain the space. More startups create cash liabilities from office space leases than productivity bonuses that generate real revenue.
Instead of rushing out to get an office, find a free place to gather your team (your living room or a local Starbucks) and hold your meetings there. If you need to meet with a client then consider a neutral meeting location. Your tiny office space is only going to make you look tiny, not professional, there are plenty of serviced meeting venues that will be more cost effective, And the money you save on not signing a lease can go toward expenses that generate more sales, not additional costs.
Forget About Hiring
The second worst offender on the cost analysis is headcount. Entrepreneurs tend to think that businesses are only real if they employ other people to help spread the workload. Another myth. Hiring staff in startup mode is generally a horrible idea.First, you have no income. That means what little money you do generate is going to go to everyone but you. To some degree that's to be expected every business starts by paying more people than the founder when it launches. But it's also an enormous liability.Instead of taking on staff, consider nothing but paid project assignments with contractors and work-for-equity or stock options arrangements. The only asset you don't have right now is cash, and that's the one asset staff is going to eat up quickly.
In order to keep the income flowing to the right places (like your pocket) you'll need to hold off on hiring as long as possible. If that means more nights and weekends at your personal expense, so be it. It's the one expense you can afford to pay.
Write on Your Hand
On your quest to create a real business,you've probably also thought about buying all of the usual staples that you generally see in offices ,computers, post-it notes, furniture and the like. Together, they make for the kind of office you worked in at the big company that paid you a salary before you started this venture.But startups don't need office supplies. You need a barebones computer a cell phone (your company's new main number), and the back of your hand to write on. Anything else is an expense.
Only Spend on Stuff That Makes Money
If you want a simple way to determine what to spend money on, ensure every expense directly relates to income for example, marketing and sales. If you can deliver your product or service without an expense, then it's not essential.
You'll find that by adopting a no expense is necessary mentality, your road to profitability will be much shorter. Then, when the cash starts tumbling in on the profit side of the equation, you can put a little in your pocket. Even a dollar of income goes straight to the bottom line when you've learned how to cut out all of the expenses. For this reason, it's best to think of expenses as the last luxury that your new business can afford. The only line item that matters right now is income, and hopefully profit. Everything else doesn't fit in the equation.
Always remember you get the monkey (Venture capital /Investors) of your back when you start to make profit...and they you have a real company..
Law N0 2: leadership equals Influence