Starting up a business can be a daunting endeavour. Launching a new business typically means leaving the security of a salaried job. With the risk and uncertainty of launching a business comes the prospect of autonomy. Maybe even eventually both financial and time freedom. Navigating the sea of change can be tricky but for those willing to set sail, the rewards can be vast.
When setting up a business in the UK, the financial success of any business is closely tied to the company’s costs. Intuitively, the better a company manages its expenses, the more probable it is that said company is operating efficiently. Profit is revenues less operating expenses.
Essentially there are two dials to tweak in search for profit; revenue and expenses. If revenue remains constant, lower cost and profit moves upwards. Now it’s impossible in a business to keep costs to zero. To make money you need to spend. However, spending effectively, particularly in the beginning phases of launching a business is key to success.
Financial Planning and Knowing Your Company Burn Rate
The first step of managing cost is knowing your burn rate. The burn rate of a company is how long they can operate for given existing expenses and funding in the business. If the company spends £20,000 a month and has £500,000 in funding, they have a burn rate of 25 months. With revenue remaining constant the company can last for 25 months.
“The first step of saving money when launching is good financial planning,” explains Richard Allan of funding partner, Capital Bean.
“A company should know its anticipated monthly expenses and resulting burn rate. The lower the cost to operate the business, the longer you can operate for. This gives more time to find product market fit, find clients and accelerate the revenue path. So when launching a business the first step to saving money is planning wisely and budgeting in a smart manner. Budget enough to get market information and make progress without being excessive and wasteful.”
Often it is easier to avoid stupidity than to chase genius. Stupidity in the case of launching a new business would be to overspend. Overspending kills profits and companies. When launching a new business, to save money keep spending to the absolute minimum. You can quickly ramp up spending if you start to see a strong return on spending.
Better for now to spend the least amount possible to get feedback from the market. To learn who your customers are, what parts of your service or product are valued and which sales and marketing channels actually work. For new businesses the main savings will be to keep salaries low and not over hire. Too often new businesses hire for projected rather than actual growth. Wait until the hire is 100% warranted vs hiring optimistically.
As founders, keep your salary low. It’s tempting to pay yourself large checks however, with salary likely being the largest expense when launching a new business. Keeping your paycheck on the lower side will allow your new company to operate for longer and give you the best chance of finding success.
Leverage tech and Low Cost High Quality Talent
Rather than hiring inefficient, expensive talent you can use freelancing websites such as Fiver. You can hire a designer to make a high quality pitch deck for £25 vs paying £8k to a professional services firm. Similarly, you can hire engineers from Eastern Europe or India to save cost whilst building the first iterations of your product.
“Leveraging efficient tech can save your company tens of thousands of pounds,” explains Daniel Tannenbaum, founder of price comparison, Proper Finance.
“Legal and accounting expenses can be a real drain on cash flow. Instead of hiring a lawyer who charges £500/hour you can leverage plug and play online solutions. Most of your early start-up needs such as employment contracts, share agreement etc. can be accessed cheaply through companies such as Seedlegals. For accounting apply the same principle, use tools like Quickbooks to easily process your own accounts.”
“For sales outreach you can use software. Email automation tools such as Drip or CRM tools like Hubspot can handle your entire outreach campaign end to end and these tools only cost a few pounds per month!”
When it comes to marketing we’d also suggest keeping paid to a minimum. In the beginning it’s better to use organic marketing channels (cost free). Learn by speaking to your early customers. If paid marketing is on the agenda, spend the minimal amount needed to test the market and get feedback. For research using free tools like Google trends and posting for feedback on sites such as Reddit can be just as valuable as paid channels.