10 ways to keep start-up costs down
When you're starting a business, every penny counts. Tim Duffy, co-founder of MeetingZone, tells us how to keep start-up costs to a minimum
When we raised funds to launch MeetingZone in 2002, we wanted to do it once and only once. We were committed to becoming profitable on the initial funds raised. We all know how hard and time consuming it is to raise funds and it's not something you want to be distracted by if you can avoid it. There is always a massive cost in terms of dilution (of equity) or bank charges. This means working really hard to preserve cash. Here's how we did it at MeetingZone:
1. Create one control point – make everything go through one person. It is vital to know about everything that is being spent. Instigate a clear expenditure approval process and make sure all your suppliers know that without a purchase order number they will not get paid. If there is no signed purchase authorisation, reject the expense. It's painful in a fast-moving company but times are hard and you always want to know the position on your cash and commitments. 2. Always check your cash daily. If cash is tight, forecast it out for three months every month or week. At MeetingZone we report our cash on a weekly basis. This discipline should never change no matter how big your company. It's an excellent discipline to have and ensures there are no surprises.
3. Treat every pound as if it's your last – ie ask the question: ‘Would I spend this if it were my last pound? Will it generate revenue, or is it a nice to have?'. Be very ruthless, it may be nice to have a shiny new laptop but will it add to revenue now?
4. Call in all the favours and goodwill you have generated over your career – borrow things; ask for a discount on everything; ask for rent-free periods; try to rent capital equipment with a conversion to purchase option; push for favourable extended payment terms with key suppliers and never ever pay retail price.
5. Tell people you have a specific limited budget for a purchase – and ask if they want your business or not, as it's all you can afford. It is surprising how flexible suppliers will be in tough times if you establish a reputation of keeping your word. It's best to get the deals upfront and far better than going cap in hand when you can't pay.
6. Don't get tied into long property leases – and do get flexible terms with regular break clauses. If the landlord won't negotiate breaks find somewhere else to base your business and try and locate employees at home where possible. There are lots of ways to work flexibly and keep costs down.
7. Avoid recruitment if at all possible! At MeetingZone we always try to automate a task if it requires the hiring of an additional person or we don't do the task! Headcount and rent will be your biggest cash burners – recruitment consultants cost a lot of money.
If you must use them negotiate hard upfront. We found the best way was to draw up a term sheet, hand this to agencies and tell them ‘these are our terms', which clearly stated a percentage fee defined as base salary only and rebates in case the person didn't work out. Don't go for replacements, go for rebates. Ideally use your network first, and use LinkedIn etc; there are many new ways to recruit inexpensively.
8. Have a very tight expense (travel & entertainment) policy and check everything. Pay minimum/legal mileage rates. Employees can claim a tax rebate if you are well under the HMRC allowable rates.
9. Eliminate paper and only send invoices electronically – the post is an expensive irrelevance. Printing invoices, stuffing envelopes, postal delays all add up. Set up your systems for automatic email delivery.
10. Focus on cash collection – and always make sure the person is expecting your invoice and will pay it, when they receive it – that way you will collect payment faster! We have worked very hard at MeetingZone on this and reduced our receivables down from 60 days average to about 26 days. How? We generate accurate bills, we email them to people who are expecting them and we follow up. It's amazing how much free cash this can generate.
We looked at factoring but why pay someone else to do what you should be able to do better yourself; let's face it, the relationship with your customer is too valuable to pass off to a third party.
I hope these tips will help you to build a successful and profitable business and remember: there is no gain without pain. It worked for us. We never did need to raise more funds and recently completed a great exit on the strength of our highly efficient service, cash generation and efficient business model. Good luck in 2012, it's going to be tough out there.
Tim Duffy is chairman and co-founder of MeetingZone . Founded in 2002, MeetingZone was acquired by GMT Communications Partners and Management for £38.5m in August 2011.