What a startup should spend its money on in the early stages is hotly debated.
Companies are always looking to cut costs, but what are some expenses that a startup should never shy away from?
2015 was a tumultuous year for venture funding. According to CB Insights, the third quarter saw funding levels on par with the dot-com boom. But there was a dramatic cooling in the fourth quarter, and that made both insiders and outsiders unsure about the future of the industry.
This has put a lot of pressure on upstart companies to watch their expenses and even cut costs. But while in some instances tightening the belt may help a company survive the lean months, knowing where to invest properly can help them thrive whatever the circumstances and economic outlook.
Here are a few costs that startups should think long and hard about before cutting.
1. A Business Plan
If you find yourself in unfamiliar territory without a roadmap it can be hard to get back on track. Similarly, a good business plan will help you stay on the road to success.
As this Investopedia article points out, “a business plan forces consideration of the different startup costs for the business.”
Founders should know what they need to spend money on far in advance. And they should have a plan for any incidental expenses that could crop up along the way.
The cost of putting together a good business plan varies. There are seminars that can teach you how to write one yourself. Or there are companies with considerable expertise that will work with you to create a unique plan.
Business plan providers or business consultants can charge a flat fee or an hourly rate. You can expect to pay $50 to $150 an hour, or a one-time fee of $400 to $1,000.
Since many startups will use their business plans to attract investors, this isn’t an area where you want to cut costs. Spending the money upfront will pay dividends down the road and will help create a clear vision as you navigate the hard terrain to come.
2. Research / Testing Your Idea
Having a brilliant idea is great. But lots of people have brilliant ideas. The job of an entrepreneur and founder is to figure out whether the idea is viable or not. This is where good research comes into play.
In many cases this research will be included with a company’s business plan. But the cost of collecting the data should be considered its own expense.
“Never spend money on production before you know that you have customers ready to buy,” writes Sujan Patel, co-founder of ContentMarketer.io and Narrow.io, at Entrepreneur.com. “Knowing what your market needs and how you can meet that need is essential for success.”
There is some controversy around whether market research is important or not. But doing the research in the beginning will help you understand how your product will find its place in the world.
3. Your Product
During the early stages, the primary focus should be on figuring out product-market fit. The next step is actually building the product.
As this Future Startup article points out, “building your product is the most important cost associated with starting a company. If you are building a tech company and you need to develop software or a web site or a platform, that is a cost you should consider seriously.”
This means either hiring a small, in-house team to get your product to market, or outsourcing the development. Either way, you can’t afford to be stingy on this one.
As you begin to put your company together, one of the biggest expenses you’ll encounter is payroll. Hiring a qualified team isn’t cheap. You need to account for their salary, any equity you may offer, and benefits.
One simple solution is to outsource some of your work.
While outsourcing will almost certainly save you money in the long run, you shouldn’t look for the lowest price possible. There are plenty of extremely talented freelancers out there who who will work for less than a full-time employee, but that doesn’t necessarily mean they’re inexpensive.
For example, the median salary for a full-time computer programmer in the United States is $79,530. That’s a pretty hefty annual expense. Rather than pay an annual salary plus benefits, you can save money by hiring a freelancer only when you need them.
Finding good, reliable freelancers will make your life easier. That means you shouldn’t skimp on their pay.
5. Employee Satisfaction
Outsourcing will solve a lot of problems, but you may find it necessary to hire some full-time employees. Having someone permanently on hand for projects that require ongoing maintenance or development limits exposure of your intellectual property from outside eyes.
Making sure your full-time workers are happy is integral to your success.
“Don’t be cheap when it comes to providing your team with everything it needs to be productive and happy,” Jared Kim, founder of WeGame, advised Forbes. “Multiple large monitors, fast machines, and comfortable chairs are things everyone will appreciate.”
It’s a good idea to make sure the equipment your staff uses is up to date, and that your system is running at its optimal level.
“You don’t actually realize how slow your system is running until you upgrade,” Anthony Saladino, co-founder of Kitchen Cabinet Kings, told Technori. “The results have been phenomenal; not only did the upgrade boost work efficiency across the board, but our company morale has never been higher.”
Morale is very important, and a happy workforce is a productive workforce.
6. CFO / Accountant / Tax professional
A good CFO or accountant can save you more money than you’ll spend on them. Getting your financial house in order isn’t something you can leave until you become profitable, and a good money manager will hold you accountable for spending and help you plan your investments.
Doing your own taxes also wastes time and energy that you could be dedicating to your business. This isn’t a huge cost, but it is essential to keep your business running smoothly while eliminating unnecessary distractions.
You can check out the American Institute of Certified Public Accountants or the American Institute of Professional Bookkeepers to find qualified candidates.
7. Lawyer / Legal Expenses
There are many services that aren’t worth your time or money in the beginning. But nearly all startup entrepreneurs will require some amount of legal assistance.
It can range from incorporation paperwork to understanding liability issues. As Patel points out, paying for good advice at the start means you won’t be stuck with big bills for legal settlements later on.
Be smart about social media.
Navid Zolfaghar was an original employee at social media startup Wildfire, which was bought by Google in 2012. He told Forbes that “a lot of companies think social media is free. It’s not. You might not see the results right away but long-term engagement will bring returns. Make sure you’re amplifying the organic good responses to your brand.”
Marketing has become a science, and any advantage you can secure in the early stages will be beneficial. This is not to say you should just throw cash away on frivolous promotional ploys. Spend your money wisely on targeted, measurable campaigns.
Think It Through
There are so many ways for startups to cut costs, but it’s just as important to know where to spend your money. Investing in your company’s future at the beginning can save you headaches, heartache, and hassle in the years to come.
If you’re looking to invest in a strong team, check out what Gigster has to offer.