Aidi — Minimising costs
Recently, we had a conversation in the community on measures founders have taken to minimise costs in the current startup environment. This article will highlight some parts of the conversation, stating what frugality is and how entrepreneurs can achieve frugality.
Before we get into discussing measures one can take to minimise costs, there is a need to be careful in ensuring that frugality doesn’t turn into looking for ways to do things cheaply. When this happens, more harm than good is done to the business. By skimping on certain necessary expenses, the business’s ability to expand and grow can be hindered. For example, frugality may entail budgeting to get the service of an accountant. An entrepreneur who’s looking to go cheap will decide to do the taxes himself; spending a large portion of time trying to learn to use Quickbooks and add the necessary entries and may end up doing it wrong. This is not to say that founders cannot attempt to learn to use tools and software for specific uses, rather, it is addressing that frugality doesn’t mean trying to do everything cheaply at the cost of time, energy and resources that can be re-invested into the business.
Now, let us examine what frugality means and how to minimize costs.
Simply put, frugality means spending smartly; being capital efficient. Jeff Bezos laid down frugality as Amazon’s 9th principal. For Amazon, it is trying not to spend money on things that do not matter to customers. Frugality breeds resourcefulness, self-sufficiency and invention. Some have defined it as doing more with less money and time.
Frugality isn’t attempting to cut costs to zero or pinching pennies. It is definitely not paying employees adequate salaries, not buying tools needed to make work easier and more productive, building things when you can buy them to save time, and it is certainly not settling for less; taking the substandard, cheaper way of doing things. Frugality involves considering survival time when evaluating expenses, saving money on things you can save money on and spending on things that actually matter. For example, it is considering if you can pay the monthly $300 subscription at the stage your startup is currently at, or find alternatives that can give the same value at a less expensive rate and then subscribe to that $300 software as your revenue improves.
As it is in the current startup clime, frugal companies have enough runway to weather unexpected events.
Over time, questions on the true meaning of frugality have risen. Some ask - does it really mean getting all your office furniture for free or buying new ones? Does it entail ensuring that you do not splurge on hiring and compensation for staff? Does it mean all office equipment should be second-hand? Is it ignoring luxury and comfort? Does doing the opposite of everything listed mean splurging and wasteful spending? Buying new office furniture, tools and equipment does not equal unnecessary spending. The frugality lies in the lifetime value of the equipment bought. How long will the new photocopying machine last compared to that of a fairly used one? If the new machine will last longer than a fairly used one even though it costs much, then frugality has been practised.
In frugality, the long-term value of a thing as well as its cost and implications are taken into account. Comparing being cheap vs frugal in this case- the cheap option will be going for the lowest immediate cost while the frugal option is going for the lowest long-term cost. Considering just money doesn’t balance out frugality, It is a sum total of cost, value, lifetime value (duration) and benefit to the company. Does your company need a photocopying machine at the point it is at or can the money for the machine be spent on getting another chair or table to make work easier for your staff? Frugality also takes into consideration, the stage and needs of the company at specific times.
Frugality isn’t saving only money but time. In the early stages of building a business, founders may have to handle more than one task simultaneously. Do you need to pay for a tool that helps you automate tasks instead of switching from one to the other, spending so much time on something that automation can do? Will hiring an additional employee help you save more time, focusing on the core business areas that need your attention? Having established in previous paragraphs that frugality isn’t doing things cheaply, then spending budgeted resources on tools and people that will aid growth and expansion can also be described as frugality.
It is also budgeting. Founders spend time speaking to customers, meeting market conditions, and increasing revenue but sometimes overlook the importance of budgeting. Budgeting helps you to see what is important and what isn’t and where the bulk of your resources should be allocated. It helps you to plan accordingly for seen and unforeseen circumstances. It prevents you from going on a hiring spree and helps you project for the year. It helps you determine if you’ll continue with your current subscriptions, look for alternatives or eliminate them entirely. It helps you to know key hirings to do and the cost for each, and it helps you map out benefits you may want to give employees and the cost for the year in line with your company’s revenue, the cost of customer acquisition and retention, etc. Frugality helps you to know where to spend and where to withdraw spending and why.
Tips on how to spend on what is important and save costs? There isn’t a one-size-fits-all approach to frugality. However, we’ll advise looking at the biggest expenses your company makes and finding proactive measures to minimize them. Some of the major expenditures of early-stage companies include real estate, wages, insurance, equipment, etc. For instance, instead of hiring an in-house lawyer when your revenue cannot fully cover the wages, perhaps getting one on a per-need basis at that particular time will serve? Will working from home instead of renting out or buying an office space help you minimize costs for the time being without affecting the output of your staff? These are questions to consider when trying to stay lean and reduce unwanted expenses. Here are other frugality tips;
Use, don’t mind:
Most startup founders are builders- people who love to try out new things and bring solutions. Sometimes, this poses to be a problem. A founder will invest so much time into building a website instead of using good and excellent templates already created. There are tons of open-source libraries, frameworks, and packages that can speed up development. Frugality isn’t only saving money but also time. Knowing that your time is precious and should be spent wisely, using already-built templates, APIs and integrations will be of immense help. This does not mean that businesses cannot build their websites, etc from scratch, it advises that in cases where a model already exists for what you are trying to develop, plugging into it will help you save time, resources, etc.
Spend on what is important:
Most businesses have the goal of achieving profitability. This means that a lot will go into achieving this goal- hiring the right people to drive the vision, organic and paid marketing, customer acquisition costs, etc. It is important to budget how much it will cost to achieve this goal. Instead of moving to a shiny office space in a popular neighbourhood, will the money be better spent on employing someone that will aid your company’s expansion and growth? Will it be better spent on customer acquisition? In frugality, it is important to make a list of preferences and spend on needs and not wants.
Again, keep in mind that frugality isn’t taking the cheap, easy way out. To help you minimize cost and stay afloat, especially in the current business clime, make a list of your company cost, have a conversation with your financial officer/ accountant, prepare a budget for the next year and remove wants that do not contribute directly to your business growth and profitability.