Every year, thousands of entrepreneurs search for funding to keep their operations running. Though a significant number of them are able to access some form of funding, a good number fail to convert this infusion of capital into tangible business growth.
In the startup world, about 70% of startups closed shop about 20 months after the first round of funding. Out of these, 29% failed after running out of cash, which was the second-most popular reason for startup failure identified in a CB Insights report.
Employing smart, money-saving practices isn’t just a domain reserved for million-dollar startups in Silicon Valley. Entrepreneurs, especially those with businesses who have just landed a loan or investment opportunity, need to find ways to prioritize expenses and stave off the temptation to splurge. Poor money management remains one of the leading reasons why relationships between entrepreneurs and their investors sour, which contributes to the high failure rate for businesses with a history of one or more rounds of funding.
While all businesses can benefit from money-saving strategies instituted around the office, newly-funded enterprises need to go an extra mile to keep investors happy. Here are a few ideas to build an efficient, money-saving entity that will not only keep current investors satisfied but will also improve your chances of getting subsequent rounds of funding.
1. Implement lean management practices from the start.
One effective way to save money within the company is by infusing the principles of lean management early on. First popularized within the manufacturing industry as a way to reduce waste and boost efficiency, lean management principles can be applied at all levels of your business and can be one of the best ways to show your investors the practical steps you’re taking to run your business efficiently.
In addition to reduced waste and improved efficiency, lean management principles can help your business reduce operating costs and eliminate things that don’t really add value to your young business, which is something that any investor will appreciate.
To get started, eliminate wasteful tendencies around the office, including poorly run meetings and excess inventory that ties up capital. Automate as much as possible to save time for the most important elements of your business, and remember to use free trials and cheaper alternatives when it comes to software and applications.
Seek out additional ideas that help you infuse lean management principles into everyday operations for maximum savings.
2. Look for ways to run efficient, measurable marketing campaigns.
While marketing remains one of the most important pillars of a growing business, a poorly designed marketing and advertising campaign can quickly gobble up resources, leaving you scampering to restrategize.
Indeed, there’s no shortage of horror stories when it comes to entrepreneurs who burnt through investor funds via their marketing campaigns. Perhaps the most memorable one was that of Fling, a social media startup that went bankrupt a few years after raising over $21 million in funding. Among many of the company’s excesses was a marketing campaign that saw the startup splash money on a wild social media campaign immediately after launch. Even though the campaign saw app user numbers rise by the thousands every day, the numbers took a wild dip after marketing funds ran out, a direct result of the company concentrating on inorganic instead of organic traffic.
There are many ways to mess up when it comes to marketing, especially when you have a whole chest of investor funds to play around with. So, to ensure you stay on the safe side, concentrate purely on marketing efforts that are measurable.
Measurable marketing involves concentrating your time and money on tactics that generate revenue as opposed to those that generate business – at least early on. Take for instance Facebook Messenger, one of the fastest-growing marketing platforms on the planet. This platform provides a powerful and personal avenue for B2C connections, thanks to the 47% of active Facebook users who access this platform via their mobile phones. Including this and related strategies in your marketing plan provides an affordable way to track the impact of your marketing efforts while creating an avenue for both revenue generation and organic business growth.
Because cash reserves are limited, you want to use the limited funds you have for campaigns that generate actionable data that can be used to improve future marketing campaigns.
3. Take advantage of tax deductions and exemptions.
While taxes can be a painful expense item on an income statement or balance sheet, there are several ways to use tax deductions to make some significant cash savings. Tax deductions include everything from auto expenses and employee benefits to little-known items, such as the interest on your loan, that have been defined by the Internal Revenue Service (IRS) as “helpful and appropriate.”
There are additional savings to be made, thanks to tax reforms that have been sweeping the corporate world over the past couple of years. According to one analysis, the $5.6 million tax exemption that went into effect in 2018 could have significant effects on income and corporate taxes for individuals and businesses, and is something startups should watch out for over the coming years.
In addition to the IRS website, the Small Business Administration (SBA) provides information on tax deductions and exemptions that may apply to your business. Your tax or financial advisor can also help identify opportunities for savings, so make sure there’s at least one person on your team keeping tabs on all business expenses and reporting the same as deductions on your returns, helping you save significant sums of cash for your business.
4. Streamline your HR functions.
One of the biggest perks of being a business owner is the ability to manage a workforce, which, for newly funded startups, shows investors your determination to achieve your business’s goals and objectives.
Human resource departments, however, are among the biggest culprits when it comes to financial waste within an organization. Businesses can lose money via many HR-related elements, including long and expensive hiring processes, high employee turnover rates, duplicate job roles – and perhaps the biggest headache for investors – litigation as a result of poor employee relations. By making your HR department run more efficiently, you can create real opportunities to save money, not only within the HR department, but across different levels of your business structure.
One effective way to get started is by employing technology to manage some of the functions that require hands-on labor. Hiring, one of the most resource-intensive elements of a business, can be done online so that the process of applications and interviews can be done without committing a significant amount of resources there.
You can also save money by using a cloud-based HR solution to help with employee relations, payroll, training, and as a base for your employee retention program, which is another important money-saving practice you should use for your business.
5. Make technology work for you.
In addition to using tech as part of your HR strategy, you can stretch it into other facets of your business – not only to save money but also to provide accountability and visibility into your business operations, which would offer a significant boost to investor relations.
There’s literally nothing you can’t automate around the office. From billing, procurement and invoicing to file sharing and collaboration, technology provides a host of money-saving opportunities for small businesses.
Still, poorly-thought-out IT policies can cause your business to spend more money than is feasible. Too often, businesses redirect significant chunks of investor funds into the latest tech – including expensive certification and technical training – without conducting proper cost-benefit analysis to determine whether these expenses are worth it. Then, when things go wrong, these businesses often find themselves burning through available funds while trying to fix these problems.
For instance, while an integrated-payments system might improve checkout speeds on your website, things like downtime and exposure to vulnerabilities might cost you dearly if you don’t have an internal mitigation strategy.
Consequently, it is important to identify opportunities that add value before investing in new tech. To this end, ensure you and any fellow founders understand the intricacies around new technology before committing any of your investors’ money. Prepare a comprehensive IT strategy that includes everything from BYOD (bring your own device) policies to an analysis of how your IT backbone aligns with your company’s strategic goals. This way, you reduce the risks associated with poor, costly IT decisions on one hand while keeping your investors happy on the other.
Remember, at the end of the day, you don’t want to be at pains to explain how the previous batch of funds was used. By instilling elements of agility and efficiency within your business, you’ll be more likely to convert your investment into growth and increase your chances at closing a subsequent batch of investment.