When economic uncertainty hits, startup CEOs often tighten their costs to extend the company’s runway. But simply cutting costs for short-term gains might not be the best play. Whether there's a financial fire or not, startup leaders should see every expense as an investment in their business. Understanding how each spending decision shapes the company's future—whether it's increasing, decreasing, or maintaining costs—is key.
Now, the real question: Can you cut costs without messing up your startup's chance to grow and run smoothly?
I've got some practical advice and real-life examples from my startup experience. Give these insights a look before you jump into budget discussions—they could help your startup strike the right balance between saving money and setting the stage for lasting success (see Exhibit 1)
Start Fresh:
Start your new year's budget with a clean slate. Forget the "old school" method of using last year's budget as a baseline, as it often leads to a repetition of the past. Instead, provide budget owners with detailed information on cost drivers to help them gain a deeper understanding of the economic implications of their decisions.
Reassess Value Drivers:
Take a closer look at what truly drives value in terms of profit and cash flow. Identify areas where you can streamline or automate processes. Smart companies recognize what sets them apart and consider outsourcing non-differentiating capabilities. For instance, one of my clients realized their partners had a greater scale in certain areas, leading to a decision to outsource non-core functions during budget discussions.
Engage Middle-Level Managers:
Encourage mid-level managers to actively pursue cost-saving opportunities. This practice not only saves money but also fosters a culture of efficiency throughout the company. Their feedback, doubts, and ideas are invaluable, serving as a bridge between the front line and senior leadership. In one instance, a mid-level manager suggested transforming a marketing event from a cost center to a profit center, resulting in the company selling tickets and turning the overall marketing budget into a positive one.
Two-Year Budget for Resilience:
Consider a two-year budget and leverage rolling forecasts, especially in times of uncertainty and crisis. This approach is crucial for a cost transformation effort to yield results in the short, medium, and long terms. It aids in prioritization and provides essential support for the bridge to the long-term financial model, which is often scrutinized by potential investors. This forward-thinking strategy ensures that your organization remains resilient and adaptable to changing economic conditions.
In today's challenging economic landscape, CEOs face a choice: take the traditional cost-cutting route, risking organizational weakening, or engage in the hard work of reevaluating fundamental business aspects. This involves identifying distinctive outcomes, uncovering operational loopholes, embracing automation for savings, and leveraging the broader ecosystem. Achieving these "quick wins" allows for effective cost management while sustaining growth and extending your runway.
