It’s very easy to forget about costs when you are focused on business development and sales. It’s exciting in the early months and tempting to 'treat' your business (well, OK lets face it.... its for you!) but you need to have an eye on cash burn. Some major pitfalls:
- Small expenses that mount up
- Been told you ‘needed’ the add on service
- Scaling before you are ready
For point 3 this centre’s around the fear of missing out. You produce 100 chairs a month, yet you think you need the software package for a company producing 10,000 a week (you get dazzled by a sales pitch). If you are not in that league yet, do not feel like you have to spend in that league.
So how do you start to control costs from the start?
Use your cash flow projections. What this will do is show the long term impact of your spending habits for your business. I would advise going to 15 months ahead.
Cash flow basic steps (there are plenty of free templates on line):
- What do you actually need to spend? (some times the sale trigger the costs so use a bit of logic here)
- Set these costs up in your cash flow.
- What do you know is 100% confirmed income? Add this next into your cash flow.
- Add in your company starting bank balance.
- At this point, you will start to see if you have any ‘red’ months, i.e. your outflows are greater than your inflows.
- Review step 1 again, are you sure you needed the top of the range Mac??
- When you have repeated this a few times you will rationalise what you actually need to run your business.
I have purposely ignored projected sales, that are not confirmed. I want you to really think about your overheads. The additional projected sales are the icing on the cake. However, it is human nature to see potential income as guaranteed and therefore you fall into the trap of spending money, you do not have.
Your cash flow may throw up negative months, so this should trigger you to think about:
- Can you negotiate better payment terms, i.e. go from 30 days to 45 days to pay invoices? Or ask customers to pay sooner?
- Equity investments
- Can you get a grant/match funding
- Do you need to tap into personal savings
- Is there a product range you need to push back and focus on what will turn a profit earlier? (cost of good sold margin can be used to compare)
- Can you increase prices?
- Do you need to secure more sales?
- There are apps you can now use to cap your daily/weekly/monthly spend- force you to stop if you feel you need that level of discipline.
A projection is exactly that it’s a projection, so be honest with yourself about the implications of your plans
- Do not worry about other people’s opinions, it’s tempting in certain industries to have flashy toys (go to Google Campus for the sea of Apples!). Stop, look at second hand, leasing and rental options. No one will know:)
- Shop around, the power of Google!
- It’s OK to haggle
- Bulk discounts are great, but factor in the cost of storage, perishability etc.
- Have you applied for a Cash and Carry Card?
- Office space, again unless you have clients visiting, do not worry about expensive options. See if you can work from home, local libraries, free co-working spaces etc.
- Impact to tax liability- Staff entertainment is not tax deductible, training is!
- There are more and more online DIY tools for web design, social media etc, many are free to use.
- Finally – IF YOU DO NOT NEED IT, DO NOT BUY IT!!
Clarification on costs in your P&L
While the net impact to your bottom line stay’s the same, it is incredibility important to understand cost of goods sold (cost of sales) versus general expenses.
The reason being, as your business becomes more complex, it’s important to separate the costs driven by your customers and the costs you drive. You could have a great margin on cost of goods sold, but all that hard work could be diminished by high overheads.
In the early stages, you may have to sacrifice your own comforts in order to invest in the quality of the product or service you create. This can be tough, but by getting into the habit early on, you can give your business the right foundations to have those treats in the future.
I will leave you with a much used quote:
It doesn’t matter how much you earn. It matters how much you save....