Intro
If there's one universal problem startups have, it's a lack of resources. Starting a business is expensive, after all. It's no wonder, then, that running out of cash is the reason for 38% of startup failures. Avoiding that fate means working on increasing revenue while containing costs. The problem is that most startups struggle to do the former as they work to build a client base. They can, however, preserve cash by being more selective about how they spend precious dollars. With that in mind, here are the dos and don'ts of startup capital management.
Don't Spend Big on the Basics
When launching a startup, spending money to build a professional-looking operation may seem wise. That kind of fake-it-till-you-make-it attitude rarely works, however. If you ask a successful entrepreneur whether they'd rather have a gorgeous website or an extra $10,000 in their business bank account, there's no question which they'd pick. So, do your startup a favor and save some money on your basic business accouterments. Use a plug-and-play website builder. Skip an office and work with an all-remote team. Buy the most basic, inexpensive business cards you can find. Every dollar you save may be the one that ultimately guarantees your business's survival.
Do Embrace Outstaffing and Freelancers
Across all industries, labor represents about 70% of the average business's costs. For a startup, however, there are ways to bring that number down to a more manageable level. One of them is a concept called outstaffing. It's similar to outsourcing, except the business retains direct managerial control over contracted employees. It's an excellent way to gain access to specialized skills and experience that would be too costly to acquire via a full-time employee. Freelance employees offer a similar value proposition. The difference is that your startup would need to take on the burden of vetting potential freelance employees. Outstaffing agencies, by contrast, prescreen contract employees for you.
Don't Scale Back Marketing Efforts
On average, a startup must spend at least 10% of its projected revenue on marketing. That's an awfully big number that makes marketing budgets a big target for cost-cutting. Unfortunately, as the old saying goes, you can't cut your way to profitability. Every dollar you take from your marketing budget will necessarily lower your long-term revenue prospects. In other words, cutting marketing spend is cutting off your nose to spite your face. So, even if you can buy your startup a few weeks by trimming its marketing budget, you may be fatally wounding it long-term.
Do Optimize Marketing Spending
Rather than cutting marketing budgets, optimizing marketing spending is a better approach. To do so, initiate a complete review of existing campaign performance. It's OK to stop spending precious marketing dollars on poor-performing campaigns. You can then use that money to double down on what works. You can also use the freed-up funds to invest in competitive analysis. Try researching how the competition spends its marketing dollars. You can even examine your competition's creative assets. Just look them up in places like the TikTok Ads Library, the Meta Ads Library, or Google's Ad Transparency Center. Then, you can realign your channel spending to exploit platforms where your competitors have less of a presence.
Don't Scale Prematurely
One of the ways that startups tend to run out of cash is by scaling too early. It often happens when a startup's management team uses pure sales statistics as a measuring stick for their decision-making. Various other signals should go into the decision to scale. One is whether your cost of customer acquisition is starting to decrease. If it is, that's a sign that your business's product is succeeding independently of marketing spend. Another is if your customer servicing costs are dropping. If they are, it's a sign that your product is mature enough that it's ready for a wider audience.
Do Leverage Strategic Partnerships
Finally, you should look for worthy strategic partners to aid your startup at every opportunity. No startup will excel at everything. So, if another company offers a service that compliments yours, look to partner with them. It's an excellent way to increase your startup's exposure and market credibility. However, in doing so, perform thorough due diligence before making any commitments. You want to be confident that your potential partner shares your values and won't give your brand a black eye.
Building Long Term Success
By conserving cash while building your startup, you dramatically increase its odds of survival. It will lengthen your business's operational runway and buy you the time to refine your product enough to gain a market foothold. And as the dos and don'ts listed here illustrate, saving money isn't difficult when you know where to do it. The trick is implementing your savings strategies from day one instead of waiting for flashing warning signs from your business bank account.
