Bills are intimidating. Startup bills can be more frightening than personal ones. SaaS services can cost hundreds or thousands of dollars a year; other fees, such as getting much-needed consultations with lawyers, can pile on fees quickly, too.
The finances and purchase decisions can become intimidating, especially since most founders (including myself) aren’t former CFOs and might have never taken an accounting class (also me during my first startup). Chances are, you also won’t have a CFO until later, too. In every direction, with every service, everyone’s trying to squeeze money out of you. Luckily for you, entrepreneurs can start squeezing back as well.
Here is a list of dead-simple tactics for helping with lowering your burn rate — these are things you can do very quickly without anyone else’s help. The list contains things to do that don’t 1) require much time or effort, and 2) require specialized financial knowledge (the most complex idea listed below is earning interest).
1. Ask for and Look for Special Pricing
Whenever you sign up for a service, don’t simply accept the list price as law. There are many workarounds to it. As a contrived example, Linkedin Premium is $29.99 per month. If you try to cancel, though, LinkedIn will offer it to you for a period of time at half the price: $15 per month. I’m not saying that you call up services and threaten to cancel; rather, there is wiggle room for the pricing, but you won’t get it without asking for it.
Sometimes, SaaS services have great startup packages, but you might not know about them — giving them a call and asking can also help you find that out. After calling our account representative at Hubspot, I learned that they had a Hubspot for Startups program that offers 50% to 90% off list price.
Another way to find better pricing is to Google it. Don’t just type in a website’s URL and then sign up from their main page. Go to Google instead and search for “[Service Name] Startup Price,” and you can find some pretty neat landing pages that can give you significant discounts or other perks for signing up.
3. Get Your $1.25 Million R&D Tax Credit
Startups may get $1.25 million (or $250,000/year for five years) in R&D tax credit for working on R&D in the US (sorry, I’m only familiar with US credits, although other countries likely have similar programs).
No, R&D doesn’t mean you have to have some laboratory with scientists and white mice—things like building software, new products, or improving products count as R&D-related expenses. Some services will help you maximize your tax credit and take a percentage of what they help you get back. Otherwise, you can pay upfront for an accountant.
The tax credit isn’t refundable. This means that, if you didn’t owe any money to the IRS, it wouldn’t be cutting you a fat $1.25 million check. At first glance, this probably doesn’t sound relevant anymore since, as a young startup, you’re not making any profit and, therefore, will unlikely be paying any taxes in the first place. If you are paying employees, you can opt to apply those credits to your payroll tax as a small business. You can also keep the credit as a carry forward and apply it in the future when you do start paying.
4. Find a Better Banking Service
This tip addresses two problems, one of which is less relevant at this time because of the current state of the economy. The more relevant problem is if your bank charges you any fees. You have probably opened the wrong account (at least for this stage of your company). Many times, you can get a simpler bank service at the same bank for free. If your bank doesn’t offer a free service for some reason, switch to another bank. When reviewing startup financial statement, I’ve seen things like “analysis fee” that cost about $120 per month, or almost $1,500 per year. Asking the founders, they had no idea what the “analysis fee” was for other than a monthly recurring charge from the bank.
The second problem is less relevant at this time, due to the current economic condition that has led to a near-zero interest rate from the Federal Reserve. Under normal circumstances, though, many banks, especially online ones, offer attractive interest rates on checking accounts — yes, checking accounts. In other words, the cash itself is liquid, and while it’s sitting, it earns interest as well. Last year, the interest rate at many online banks was 2%; that was an extra $2,000 per year for every $100,000 sitting unused.
We all want to pay others what they’re worth. Some founders confuse this with negotiating — i.e.; they don’t want to negotiate because they don’t want to offend the other party. This is a bad perspective for a few reasons:
- as a founder, your decisions should be aligned with the best interest of the company, not of the consultant or service you’re paying for;
- negotiating doesn’t just mean trying to chip away at costs — there are other things you can and should be negotiating for.
You can ask for common things in your negotiations: price, services/features, payment terms, and contract duration. Price is just about asking for a lower one. Sometimes, negotiating on the services/features being delivered can help with the price conversation, too. For example, cutting down on some of the services being offered by a consultant could be a reason for why you want a lower price.
Payment terms should also be discussed if the terms are a concern. While sometimes the price is non-negotiable, payment terms can be more flexible. One startup I know needed to pay $100,000 to initiate a project. Instead of paying a lump sum, which is what the service provider normally got, the startup was able to negotiate a quarterly payment plan over the course of a year. The payment plan is great for several reasons, including having more short-term financial flexibility and earning interest on money they don’t have to pay now, which is like an indirect discount.
Sometimes, services require a minimum commitment term. It never hurts to ask for some wiggle room there. I’ve seen startups avoid quarterly commitments and instead go month-to-month. This gives the startup more freedom in the event of any negative financial activity that may cause it to cut costs; furthermore, it helps mitigate quality risks (e.g., if the agreement isn’t working out, the startup can exit faster).
6. Get a Corporate Credit Card
The value is self-evident. Not only do you get to delay payments until the next billing cycle (read: collect more interest), but you also earn points that can be used to apply credits to upcoming bills or pay for other purchases (e.g., items your company purchases on Amazon or business-related travel items). It’s also better than using your personal credit card and expensing it because it keeps the finances separate.
7. Eliminate Shadow Charges
Shadow charges: they happen all the time, and it only gets worse as a company grows. Some of the most common forms of shadow charging are:
- forgetting to terminate cloud servers;
- different people purchasing the same service; and
- not removing paid accounts of contractors or interns.
The fastest way to eliminate shadow charges is to review your monthly bank and (if applicable) credit card statements. The company likely makes fewer transactions than a normal consumer account, so reviewing it shouldn’t take too much time, but can quickly help you identify any suspiciously high costs.
At a previous startup, we ran so many different cloud environments on AWS — servers were deployed in different geographies, disks were still lying around unattached to machines, etc. After reviewing the bills, we realized we spent about $6,000 per year on things we weren’t using. That’s a lot of money, especially for a startup, and it was disguised in $500 monthly increments, covered with other AWS costs.
As a startup founder, you will be wearing multiple hats. With many little fires to put out everywhere, small things like expenses might get brushed under the rug. Occasionally, though, by just doing a little bit of cleaning up, you can get your expenses back in order and lower your burn rate to keep your company going. You can also spend that extra money you’ve saved on other, more important things.