The Revenue Equation

U Posted by Admin
\ January 17, 2014

Ask any established entrepreneur what the most basic formula in the startup world is, and they’ll most likely say:

“Revenue minus expense equals profit.”

While this may seem extraordinarily obvious, you’d be surprised by the number of startups who fail to recognize the importance of this formula as they get started – and you may be one of them.

Although no startup succeeds without revenue, there are many startups who have failed because they couldn’t manage their expenses. Wise entrepreneurs realize that in order to keep the ship afloat, you need to carry as little weight as possible. In other words, you need to cut expenses wherever you can – even the ones you thought any startup should have.

Ditch the office space

Leasing an office space before absolutely necessary is one of the single worst expenditures an entrepreneur can make. Many entrepreneurs believe that if their startup has a single place that all employees can work from, everyone will be more product and they’ll appear to be a “real business.” That part is true – you’ll definitely be more productive in a shared space..

But at what cost?

Leasing an office space is never inexpensive, and the net benefit rarely outweighs the cost. Surprisingly, the monthly lease payment alone is very rarely the largest cost. Once you move in, you’ll need phone lines, furniture, and maintenance services; these can all add up very quickly. In fact, most startups leasing an office end up increasing their cash liability rather than increasing their real revenue.

Instead of taking on this huge liability, find a free location to gather your team and hold your meetings there. This could range from your living room to a coffee shop – whatever is most convenient. If you need to meet with a client, hold the meeting at a neutral location. Holding a client meeting in a tiny office space will only make you look tiny, not professional. The money you’ll save by not signing a lease can go towards expenses that directly contribute to more sales.

Keep it small

The next worst offender on the cost analysis is employee overhead. Entrepreneurs may think that businesses are only “real” when and if they employ others to whom they can delegate parts of the workload. This is a myth – hiring staff in startup mode is generally not a good idea.

First, you have no income – so whatever money you generate at first is going to go to everyone but you. To some degree, that’s normal – every business starts by paying others more than the founder at launch, but it’s also a huge cash liability.

Instead of hiring employees, consider hiring contractors for paid project assignments and sweat equity arrangements. The only asset you don’t have right now is cash, and that’s the one asset that employees will quickly consume.

In order to keep the income flowing, hold off on hiring for as long as possible. You may need to work more nights and weekends, but time is the one expense you can afford to pay.

Write on your hand

On your quest to create a “real business,” you’ve probably also thought about buying all of the usual staples that you generally see in offices – computers, post-it notes, furniture, and the like.  Together, they make for the kind of office you worked in at the big company that paid you a salary before you started this venture.

But startups don’t need office supplies.  You need a barebones computer (eBay: $100), a cell phone (your company’s new main number), and the back of your hand to write on.  Anything else is a frivolous expense.

If it doesn’t make money, don’t splurge for it!

If you want a simple way to determine what to spend money on, ensure every expense directly relates to income – for example, marketing and sales.  If you can deliver your product or service without an expense, then the expense is nonessential.

By adopting this mentality, you’ll find that your road to profitability will be much shorter. Then, when the cash starts tumbling in on the profit side of the equation, you can put a little in your pocket.

Even a dollar of income goes straight to the bottom line when you’ve learned how to cut out all of the expenses.  For this reason, it’s best to think of expenses as the only “luxury” that your new business can afford.  The only line item that matters right now is income, and hopefully profit.  

Everything else doesn’t fit into the equation.

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