Cash flow management is already a challenge for startups, but COVID-19 is not making matters better. With unemployment rising and people spending less money on certain goods or services, startups are likely to suffer during this time. However, reducing operating expenses can help a startup stay afloat until operations are back to normal.
Reducing overall operating costs can certainly impact your bottom line, especially as the impact of COVID-19 is felt. Also, reevaluating the budget and allocating funds to different operations can keep essential parts of your business going. Keep reading to learn more about how to reduce the operating expenses for your startup while staying productive during COVID-19.
Review Your Budget With a New Lens – When you created your budget for the year, the coronavirus was not likely on your mind. And, with updates and changes happening so fast over the last several months, 2020 can feel like one big game of catchup. Now that shelter-in-place ordinances are lifting and people are venturing back out into the world, it is a good time to reevaluate your operating budget and emphasize cash flow management.
Revenue projections are likely in need of an update, and your outlook for 2021 is different now than it was a few months ago. From lower sales numbers to higher churn rates, the priorities of your budget need to be evaluated. However, it is important to avoid simply slashing your budget. Wisely evaluating the numbers may indicate that some areas of your business are actually improving during this time.
Renegotiate Contracts – The impact of COVID-19 is being felt across the country and global economy. If your business has shifted, it is likely that others connected to you have done the same. Cash flow management has now become more crucial than ever. You may be able to renegotiate terms or contracts during this time to give yourself some breathing room. From reducing office costs to eliminating subscriptions, there are some measures you can take to prevent waste and enhance your cash flow management.
Office Space – If your company has shifted to remote work, you are likely paying for empty office space. Your landlord may be willing to negotiate your terms due to the unprecedented circumstances. In some cases, shelter-in-place orders may prohibit you from working in the office altogether. Review your contract to see if there are any provisions for a situation when the office space is not usable.
Subscriptions – Your startup likely has multiple active subscriptions. Whether you rely on monthly professional services, like IT support, or SaaS licenses to run your business, there might be some room for cuts. Try negotiating with your partners or vendors to reduce subscription costs. You may have licenses that you are no longer using or termination fees that can be renegotiated.
Deferred Payments – In cases where you cannot reduce operating costs in numbers, ask for deferred payments. Lengthening the payment cycle can improve your cash flow temporarily and get you through a rough patch.
Eliminate Nonessential Tools – When you re-evaluate your budget, you may find that it is skewed in one area. Go line by line to review the various tools and services used by your business, determine which are essential and which items can be cut. Reviewing financial statements is a great way to visualize where your budget is going, instead of assuming and is an integral part of cash flow management. You may have duplicate tools, tools that are no longer in use, or items that can be replaced with a less expensive alternative.
Cut Unnecessary Licenses – Reviewing all the tools and services used by your team could also highlight which services have too many licenses. Are all licenses being used, or can some be eliminated? Also, you may be paying for additional functions that you could go without, at least for the time being. Dropping your subscription tier or reducing the number of licenses could help lower operating costs.
Cut Out Paper – While it may seem small, going paperless can help your bottom line. Businesses spend quite a bit on paper, printers, and ink every year. If your team is working remote, there is even less reason to use paper. When you return to the office, you can continue the habits formed during quarantine to reduce the overall paper usage of your business.
Stay Flexible – Things are likely to continue changing as we learn more about COVID-19 and its overall impact. There may be unlikely opportunities to reduce your operating expenses over time and improve upon your cash flow management. The unpredictability of COVID-19 combined with the changing nature of startups makes it important to stay on your toes. You may find yourself considering new or innovative ideas that you would not have previously thought of.
Evaluate More Frequently – Periodically evaluating your budget and performing consistent cash flow management can help you stay more agile and flexible. As your startup changes and evolves, your operating costs need to follow. Set up more frequent evaluations to stay on top of your operating costs and adjust as needed.
Pause Large Investments or Projects – For many startups, cash flow is limited. COVID-19 is putting major purchases and projects on hold until businesses can stabilize. Instead of considering these pauses as losses, pay attention to the money you are saving and the cash you are making available.
New Equipment – Were you planning to upgrade everyone’s laptops this year or purchase a new phone system? COVID-19 may not be the right time to make major investments like purchasing new equipment. Instead, stick to only buying what is necessary. Look for refurbished or second-hand items when possible to save on operating costs. Delaying large capital expenditures is an essential part of responsible cash flow management.
Marketing Initiatives – Unless your marketing initiatives are seeing a positive ROI, it may be time to pause big projects. Instead of rolling out previously scheduled campaigns, reevaluate your marketing calendar to determine what will move the needle for your business. If your customers are pushing off on buying decisions, now might not be the time to invest in sales and marketing.
Utilize Free Trial Periods – If you absolutely must purchase a new service or equipment, take advantage of free trial periods. Ensure the vendor is the right partner for you by testing their product or service ahead of time. In some cases, vendors will negotiate on the trial period if you are serious about buying.
Reduce Payroll – Finally, reducing payroll can help lower operating costs. Many startups see this as a last resort because it greatly impacts your operational capacity as well as the individual lives of employees. However, in some cases, it is a necessary measure and one that should be examined immediately.
Implement a Hiring Freeze – You can make steps towards reducing operational costs by implementing a hiring freeze. Avoid filling positions unless necessary. Your team may be stretched thin, but you can avoid eliminating current positions this way.
Contract Out – Instead of hiring for new positions, contract out when possible. For example, you may need financial guidance during COVID-19. You can contract with a freelance CFO to work part-time at a lower cost than hiring an executive-level position. Firms like K-38 Consulting provide services from top-notch financial advisors, and you only pay for services when you need them.