The Dreaded Burn: Managing Burn Rate Responsibly During Economic Uncertainty
Today's contribution is a guest post from David Mandell, CEO of PivotDesk.
You already know 90% of startups fail, but recently, we’ve seen that it’s not just the fledgling companies taking a hit. In today’s volatile economic climate, even billion dollar companies are visiting the unicorn graveyard for their final rest. It’s a trying time for businesses of all stages, and the path ahead looks bumpy.
With striking similarities to the early 2000’s dot.com bubble burst, many say the current tech bubble is ready to pop, and as a result, VC money is becoming harder and harder to come by, meaning many startups—even some of the good ones—will be left out in the cold. And in the midst of all this uncertainty are dozens of once-promising companies from HotelTonight to Twitter defaulting on projections and conducting massive layoffs.
Regardless of whether the tech bubble bursts or not, investors are already becoming more conservative and will expect the businesses they do back to approach spending carefully and innovatively. In her piece, Why This Startup Bubble Won't Pop Like the Last, Biz Carson explains that if entrepreneurs “can't show that their business can make money and are burning through too much cash, then they won't survive the industry shift.”
The key to weathering the storm and managing burn responsibly in this uncertain economic climate?
You see, if billion dollar companies with entire teams dedicated to foreseeing the future aren’t immune to unpredictability and volatility, then chances are, neither is your business.
If you want to be part of that coveted 10% of startups that do make it, it is crucial that you find innovative ways to build flexibility into your business plan — and most importantly, your budget.
Overhead: taming the beast
When it comes to structuring your budget, chances are, planning for overhead spending is probably your biggest challenge. And while reducing overhead is a daunting, unsexy task to tackle, following the status quo can sink your ship even when it’s sailing. We’ll get to some hacks for reducing overhead, but first, let’s start with a few quick definitions:
Overhead refers to the non-revenue driving expenses of running a business. Think office space, utilities, taxes, insurance, non-revenue driving salaries, travel, accounting services and office supplies.
Fixed expenses are line items like rent, insurance and salaries. They don’t change based on your revenue.
Variable expenses are line items like tools, IT subscriptions, professional service fees, office supplies, and shipping. They may fluctuate based on the amount of business you’re doing.
Let’s take a look at some strategies I’ve used for slowing burn rate by structuring overhead spend with flexibility in mind.
- Analyze spend constantly. How much are you spending quarterly? Monthly? If you don’t know, conduct a monthly cost benefit analysis. Go line by line to determine where you can save money and where you should be spending more. The traditional way of budgeting might dictate that you evaluate yearly, or even multi-yearly. In doing so, you assume that you’ll spend a certain amount of money proportional to how much business you’re doing. Given the dynamic nature of your business, can you really accurately project this far ahead? Uh – no!
- Modify the budget accordingly. Once you’ve determined where you are over or under spending, find ways to reallocate your resources to provide more value. Are you spending too much on travel? Find a solution. Uber for Business helps companies save $1,000 per employee when business travelers use Uber instead of a taxi. At PivotDesk, we were paying for more CRM logins than we needed so we reduced our cash outlay, started paying only for what we needed and we’re now saving enough to implement a team lunch on Mondays.
- Leverage contractors. Manage your costs by hiring contractors for key services like design, office management and even CFOs rather than FTEs. With staffing being one of the highest overhead costs a company incurs, the idea of scalability becomes even more important. Seek out fractional CFO firms, a local design studio or freelance accountant until which time you need a full-time staff member to come on board. At Pivotdesk, we use Trinet for HR and outsource design work to local design firm, Emerson Stone who also happens to PivotDesk space from us.
- Hire carefully. At PivotDesk, People represent our highest overhead costs. We view our staff as our most valuable organizational assets, so hiring great people only contributes to our revenue. But I’d remiss if I didn’t say that the more people we employ, the higher our burn rate, so it’s always a decision we make with caution. The last thing you want, is to bring on an employee you can’t afford…
- Bundle tools and services. One-stop-shop tools might look attractive, but do you really need all that capability? What if you were able to bundle together more cost effective services and reach the same goal? We bundled Customer.io, Aweber and Google docs, and with some internal development resources, created a completely customized marketing machine that works exactly the way we need it to, for thousands less than a traditional marketing automation platform would have cost us.
- Negotiate everything. Haggle for services like internet, marketing software, real estate or any tools that cost your business money, like your life depended on it because it just might in the long run. Take full advantage of free trials, introductory offers and whatever else they have to offer to get the best possible deal. Once you try it out or reach your expiration date, don’t be afraid to re-negotiate. In the startup world, every dollar counts.
- Barter when it makes sense. Startups and companies still getting off the ground are always looking to get their name and logo out there. Consider promising an excellent testimonial or logo placement on your site for discounted services. You never know until you ask — so ask!
- Rethink your office space needs. Take an especially hard look at your office space spend. Office space is the second highest expense businesses face after headcount. Under a traditional 5-10 year lease, a 10-person team renting office space in NYC, for example, will likely spend upwards of $150,000 per year. Luckily, companies that demand flexibility when it comes to office space have options. With the rise of flexible office space solutions like coworking and office sharing with PivotDesk, which allow companies to save thousands of dollars and avoid lengthy leases using a pay-as-you-need-it model, there’s no need for a businesses to risk burning through their capital with a bad commercial office lease.
Keep the Fire Lit, But Don’t Burn Out
Burn is real and running out of money is a fate that many startups succumb to. But don’t let fear and uncertainty in a volatile economic time scare you. Instead, let it drive you to innovate. Preserve your cash and invest in tools, services and people that are flexible and support the agile operation of your business. And when you do have some extra cash, spend it on your people. My proudest asset is my team and my goal is always to keep their enthusiasm and energy up so we can ensure a long runway for PivotDesk. So far, we’re doing just that! I hope this advice does the same for you.