While it’s inspiring to be at the helm of an up-and-coming startup, especially if you have a groundbreaking idea that you think will change people’s lives, it’s not always a cakewalk. In the early stages, it can be challenging to maximize profits if you don’t prioritize your spending. Startup business owners often fall into the trap of overspending and incurring losses in the long run instead of investing in only the essentials and maximizing their returns.
Aside from an ineffective business plan or lack thereof, one of the most common business challenges is the lack of financing or working capital. At times, business owners aren’t aware of the revenue vs. expenses ratio, which results in losses that can adversely affect the business at a critical stage in its development. Some entrepreneurs also engage in a self-defeating “price war,” pricing below standard in an effort to come out first in a saturated market.
The good news is that there are ways to save up on business costs while also increasing productivity and profitability. The trick is finding the method that works for your business and seamlessly integrating it into your business model and workflows to minimize disruption and, of course, costs.
Common Business Startup Costs
Building a business is not just about finding office space, furnishing it, and hiring people. A lot has changed through the years, and with the rise of work-from-home setups, remote work and hybrid working arrangements, the value of flexibility and adaptability has become front and center for business owners both old and new. This flexibility applies to both how companies hire talent and how they set up working arrangements.
“If you build it, they will come” is a meaningless maxim if customers come to a broken system and a messy customer journey and experience. While having customers is good, relying on customer acquisition without a proper plan and system in place will end up losing precious capital instead of earning revenue. As such, it’s vital that you learn about and prepare for the common startup costs so you don’t inadvertently lose money while trying to build your startup.
Borrowing Costs
Regardless of the type of business you’re setting up, you will need an infusion of capital. For most new entrepreneurs, this will come from a small business loan, typically referred to as debt financing. Another option of financing a business is through equity financing, which requires the issuance of stock. Equity financing doesn’t usually apply to startups because most of them are sole proprietorships.
Borrowing costs include the interest payments of the business loan, which should be included when calculating the actual cost. Defaulting on a business loan is an expense that can cost you your startup, so it’s important to plan for borrowing costs at the onset. Business loans can be acquired from local banks, lending companies, and other financial institutions. Of course, you will first have to consider
Insurance, Permits, and License Fees
To keep your business running, you will need to submit to inspections and acquire the proper licenses and permits. You may need industry-specific permits depending on the classification of your business. Otherwise, you will need to have the standard business permits and permit to operate.
Together with these fees, you will also need to consider insurance costs. Insuring your business assets, employees, and yourself from any liabilities will help avoid expensive lawsuits. As a rule of thumb, every business should have liability insurance to protect the business from claims of property damage and bodily injury caused by accidents and other unforeseen circumstances.
It’s also a good idea to include liability protection in your contracts. This will protect your from legal action against non-fulfillment of a contract due to a third party, acts of nature, or other uncontrollable occurrences. Talk to a lawyer and discuss your options early on so you won’t need to discuss them when you’re already facing a lawsuit, which is much more expensive and disruptive to business operations.
Supplies and Equipment
Aside from choosing what equipment your business needs, you will also have to choose between buying or leasing them. This decision will be different for every business depending on the current state of business finances.
Leasing may be a viable option to save on equipment costs, since you can see which equipment you really need and use on a regular basis. This will provide you vital information on what type of equipment you need to purchase later on. Of course, you should always consider the type of equipment and the terms of lease before making a decision, as leasing may not prove to be your best option.
Technological Expenses
Technological expenses include the cost of building a website, setting up information systems and networks, acquiring software licenses, and others related to technological assets and infrastructure. Some companies, especially startups and small businesses, choose to outsource some functions and infrastructure to save on technological expenses and other related costs like accounting and payroll.
Marketing and Promotion
Promoting one’s self is required for every startup or new business because it’s the only way to get your brand out there and in front of your target audience. There are a myriad of ways to go about this, however, and you’d be surprised at how challenging it can be. Most promotion efforts can be done online nowadays, but the traditional ways of promotion and advertising are still available and can help boost your brand and reputation.
With self-promotion, of course, also comes marketing, which refers to a company’s efforts to attract clients and retain customers. Through the years, marketing has become sort of a science, with many experts that can provide you an advantage in today’s competitive business landscape. It’s advantageous to employ the services of dedicated marketing companies that have years of experience and a track record of success.
Manpower Costs
A business needs people and talent. For most companies this is the main consideration because it will help keep your business running like a well oiled machine. Therefore, wages and employee benefits should be part of your costing and plans early on, even if you have no plans of hiring people just yet.
Manpower or labor costs fall under two main categories: direct or production labor costs and indirect or non-production labor costs. Indirect labor costs refer to the wages and benefits of employees who maintain equipment or provide similar types of support to employees in production or those who are responsible for creating the company’s products.
Labor costs are important because they can affect product pricing and can sometimes cause you to go beyond the actual cost of the product, which also negatively affects your bottom line.
How to Reduce Business Startup Costs the Smart Way
There are inevitable costs when stating a business, but there are also ways to manage these costs effectively so that they don’t hurt your profits or put a monkey wrench in your business plans. Below are a few tips that can help you cut business costs—the smart way.
Tip #1: Outsource Key Functions
Employee wages and other benefits are one of the biggest business expenses, especially for startups that are starting with a limited budget. Hiring employees directly can lead to large labor costs and overhead expenses, plus you’ll have to consider employee benefits and other mandated employment policies and regulations.
You can even hire an outsourcing company to do your business process outsourcing for you. You need to be proactive for the venture to be successful, though. You should establish clear and specific processes and document them so they can be adopted by your chosen outsourcing partner. Outsourcing is also an excellent option for seasonal roles and functions. You can cut business costs significantly by outsourcing services only when the need arises instead of hiring full-time workers.
Tip #2: Digitize Documents and Processes
Digitization won’t only help you save on business costs, it will also help the environment by reducing your carbon foot print. Depending on your business, physical documents may not always be necessary and can even be wasteful. Papers and other physical documents take up space and can also rack up storage costs as they pile up and require you to rent space for their storage.
By digitizing your documents and other files, you can eliminate storage and other physical maintenance costs. You can also use the space you save for other business operations instead of wasting them on storage.
Tip #3: Automate Business Processes
Business process automation may seem complex, especially if you’re just starting out, but it’s a process that will pay for itself in the long run. The biggest benefit of automation is giving you back time; by automating business processes, you and your employees can complete tasks in less time and increase overall efficiency. It also reduces the probability of human error and avoids rework and repetition, minimizing overall business costs.
Tip #4: Invest in Digital Marketing
Depending on the nature of your business or the type of product you wish to bring to market, you may be facing an oversaturated market. There are already a number of established firms that may be offering a product or service similar to yours, and these companies control a significant share of the market. If your company or brand name isn’t out there with the rest of them, there’s no way that you can get a competitive advantage.
Fortunately, marketing your brand isn’t as hard as it was before because there online tools and platforms available that will help you do just that. Digital marketing allows you to maximize your reach without emptying your pockets. Leverage social media, email marketing, search engine optimization (SEO), online ads, and other digital marketing avenues to save on marketing expenses and avoid giving too much effort on campaigns. There are also tools that can help automate your marketing campaigns. Check out what’s available and see which ones apply to your business needs.
Cut Business Costs With the Right Outsourcing Partner
Business startup costs will vary for every company. As such, it’s vital for a startup to know about the costs of starting a business and how it can prioritize spending so that money doesn’t go to waste. When it comes to building and scaling a startup or small business, outsourcing can help save money and time so that business leaders and stakeholders can focus on providing the best service and building a solid customer base.
Schedule your free consultation today to see how we source the best talent available in the Philippines and find the ones that fit not only your business requirements but also your company culture and vision. The people that make up your organization are as important as the business strategies that move it forward, and we at nXscale believe that they should go hand in hand in helping the business realize its bigger goals.