Posts Tagged cost reductions
Reducing costs in creative ways
Posted by Steve in Capitalization on October 28, 2009
Reducing costs.
Sounds simple and everyone uses it as a buzzword. Here are a few ways startups can reduce costs:
- Instead of buying new equipment buy used. One startup was planning on spending $3495 on a new vinyl printer/cutter. They found one on Craigslist for $700 and it included a number of rolls of vinyl at no extra cost.
- Instead of both founders quitting their jobs have them work part-time and take no or little salary. It will take up more of their time, and it will make tough decisions between working the second job and “spare time” but that is the tough choices that need to be made.
- Instead of renting or buying a large facility, look for something smaller, or part of someone else’s space that you can rent from them. You get a more affordable space and exposure to their clientele. They get money for space they are not using.
- Providing space to a customer that provides you services in exchange. Cash is not exchanged but both companies get something of value.
The central idea is to reduce costs by finding alternative solutions that deliver the same thing: used vs. new, resources paid in ways other than cash, reducing the quality without compromising expectations, and by trading instead of cash.
Big Plans Can be TOO BIG
Posted by Steve in Capitalization on October 27, 2009
Most startups have big plans on providing fabulous products and services. They will be in glorious facilities, many employees using the latest equipment, and creating the best products/services. A business will either need a lot of funding or a lot of sales from the onset to support these operating costs.
The harsh reality is that most businesses will not get either of these. Funding on the scale that most startups want usually only goes to companies with existing sales, existing relationships, or founders with track records of raising money and making money. I have done a number of proformas for startups and it always comes down to this: how do you do reduce your need on super funding and super initial sales?
For example, a company may have an initial burn rate of $60,000 per month. Their sales in month one is zero and they have no existing contracts. They expect to eventually do $100,000 in sales per month (this is a small business). They are not going to do that right away. If they are lucky it will ramp up within the first year.
So in 12 months they make $650,000 and spend $720,000 which leaves a shortfall of $70,000. Not a lot of money in the grand scheme of things, but say they only have $25,000. What do they do? They may be able to find investors for the $45,000.00; but what if their sales projections are off, and they only do half that amount? Then they are off by $375,000 (still include their $25,000).
I always look at the following things that they can directly control: reducing costs, stage buying things, and stage expansion.