6 Cost-Cutting Strategies for Startups
When starting a business, everyone aspires to make it big. Some entrepreneurs have a stellar idea to kickstart their journey, whereas others have identified audiences’ pain points.
Unfortunately, today’s business landscape is highly saturated; hence, it takes more than ambition to be successful. First, you must bridge an existing market gap that caters to a substantial audience. There may be a demand for diet-friendly breakfast shops or expense-tracking software. It will give you an idea of what people want, ensuring your business model caters to their needs.
Second, you must keep the prices low to penetrate the market and gain an edge over well-established market players. However, this can be tricky. As a new business owner, you don’t have any economies of scale to push down prices while maximizing profit margins. The only way to manage this is by cutting back on your costs.
Often, new business owners go over the board with startup costs. They go all-in, renting an office space, getting new machinery, and hiring a giant team. It might seem like the right thing to do, but it can make it challenging to capture market share. Let us show you the ropes if you are in the same boat. Here, we have outlined six cost-cutting strategies for startups.
- Minimize Overhead Costs
Every startup has to incur multiple expenses when starting its operations. Some costs are directly associated with a cost unit since it is linked to the products and services you sell. However, other expenses are business overheads, including rentals, miscellaneous expenses, utilities, etc. If reducing the size of your workspace does not work, operate remotely and use co-working spaces for occasional meetings. Look for a virtual office where you can get a business address in prime locations. You can compare getting a virtual office address rental with property rentals to check how much you can save. Besides this, you can also reduce overheads by scaling down miscellaneous expenses, reducing paper usage, and integrating savvy software solutions.
- Negotiate with Suppliers
Truthfully, negotiating deals with suppliers can be challenging, especially when you are new to the market. Your lack of past credit record and market reputation can make it difficult to bag practical payment terms. How can you go about this? Here are a few tips.
- Set your bottom line to determine the least minimal you can accept. It will help you stay focused and avoid making commitments you might regret later.
- Remain flexible while negotiating to reach an agreement and be open to discussions.
- Get referrals from your friends and family members.
- Leverage your network and suppliers to negotiate a lower price for products. For example, if the supplier has excess inventory, use that information for a lower price.
- Lastly, don’t be afraid to walk away. If a vendor isn’t meeting your expectations, look for other options.
- Look for Tax Breaks
Most startup owners struggle with tax calculations and filing. Some pay taxes on their income, whereas others deduct them from profits. While both approaches seem correct, the goal is to take advantage of tax breaks and reduce taxable income. Firstly, you should add together all costs incurred to run the business. It could include travel bills, utility expenses, rental payments, and much more. Remember, all these costs are tax-deductible, meaning you can subtract this from your gross profit, reducing taxable income.
Moreover, you can deduct depreciation expenses for your fixed assets. After all, you have to depreciate all your assets over their useful life to spread its cost. It will further reduce taxable income, helping you save money on taxes. If this seems tricky, you can work with a tax professional to minimize the tax burden.
- Open a Floating Credit Line
Despite implementing competent financial management strategies, making ends meet is challenging for startups. After all, you are new to the market with minimal resources available. In such circumstances, it is best to open a line of credit. It works like a loan, but the borrowing limit is floating. It means you can repay and borrow with flexibility through this credit line.
For example, if your credit limit is $40,000 and you only took $2,000 monthly to pay off a supplier, you repay the same. Likewise, interest is also charged on the amount you borrowed, i.e., 2,000 instead of your entire credit limit. This option could be far more cost-effective than acquiring working capital finance or a business credit card.
- Outsource Operations
Another strategy for cost-cutting is to outsource a few business functions. So, how about you outsource your human resources (HR) department? It will enable you to hand over all recruitment activities to specialized personnel. You can give a list of openings in your company, and they will shortlist candidates. It will save the time and hassle of reviewing hundreds of CVs and aligning applicants for interviews.
Similarly, you can outsource the marketing department and get access to the latest technology without incurring extra costs. All marketing agencies have specialized software and applications, allowing you to focus on your core competencies and expand market share. In short, outsourcing could improve competition and increase business revenue.
- Lease Assets
Most startups go all-in when running a business, and that is where they make the mistake of purchasing fixed assets like machinery, plants, etc. Their capital is already minimal, and asset investment drains away all the money. Hence, they are left with a small portion to invest in other business activities. So, instead of purchasing an asset, why not opt for a lease? It is a long-term financing model that enables businesses to buy an asset on credit.
Every business must make a down payment upfront, comprising at least 30% of the asset’s cost. However, the rest gets divided into the asset’s useful life. If you leased a plant for $500,000 with a useful life of 20 years, you must pay $150,000 upfront. Likewise, the rest gets broken down into small installments of $17500 annually, exclusive of interest. As the upfront cost will be lower, the financial barrier to entry will be accessible, leaving you with sufficient capital.
Final Thoughts
Believe it or not, the earliest stages of business are the hardest. You will strive to make ends meet, impress customers, and provide the best customer service. Similarly, you will face numerous financial hurdles financially as startup expenses keep skyrocketing, whereas inflows will be minimal. That is why you must look into reducing your business costs every day and make informed choices as your business grows.
