In today’s episode, Steli and Hiten discuss the various ways startups can remain cashflow positive. You can manage your cash flow by generating more revenue or by simply controlling your expenses. Steli and Hiten stress the value of tracking expenses, deciding what’s worth your money, and how negotiating for those larger expenses can go a long way in staying cashflow positive. They also explain why long term contracts should be avoided by a startup and how the right mix of common sense and planning can prevent your costs from spiraling out of control.
Time Stamped Show Notes:
- 00:05 – Today’s Startup Chat discusses how you can manage to stay cash flow positive
- 00:30 – So far, Steli and Hiten have concentrated on how to generate cash
- 00:51 – Today, we are going to talk about managing cash flow via generating more revenue as well as controlling expenses
- 01:16 – Two simple steps to save money and improve your cash flow:
- 01:25 – The first step: know where you are spending it, second step is to determine where this money should be spent or not
- 01:46 – Ask yourself whether there are any cheaper alternatives
- 01:56 – Have a set evaluation process in place which can help you determine if the money is worth spending
- 02:23 – Most startups do not have a defined process for making purchase decisions
- 02:45 – In all of Hiten’s businesses, expenditures are entered into a spreadsheet and checked regularly
- 03:08 – In smaller setups, the responsibility of entering this data is with the cofounder or someone reporting directly to the cofounder; In larger setups, a finance professional looks after this functions
- 04:00 – Centralized purchase decisions are quite uncommon in the startup world; smaller purchases can be made by numerous individuals which leads to expenses spinning out of control
- 04:56 – Spending is a subjective thing and different people tend to react differently to different expenses
- 05:32 – Steli does not put too much thought behind expenses less than $100, whereas he is really conservative when it comes to big purchases; his cofounder is aggressive with the larger purchases and careful with the smaller ones
- 06:43 – Smaller purchases tend to add up to a significant amount in larger organizations
- 07:15 – Spending habits can be traced back to a person’s upbringing
- 08:00 – Not wanting the weight of monitoring cash flow, Hiten prefers to let his cofounders handle this business function
- 09:53 – Always spend less than you make to be cashflow positive
- 10:11 – Keep a close watch over your cash flow, especially if you have yet to raise money
- 10:25 – Monitoring your bank account and credit card statements is a simple hack which will help you be cashflow positive
- 11:05 – Negotiate really hard; the higher the expense, the more you should negotiate
- 11:28 – Particularly applicable to technology infrastructure providers; you can save a significant amount by renegotiating, entering promotional codes, discount coupons and establishing relationships
- 15:20 – Quite common for founders to lose track of their expenses and run out of money
- 15:58 – Even implementing standard, basic checks will go a long way in ensuring that a startup does not run out of money
- 16:15 – Be cautious while signing long-term contracts like office leases; if you hit a rough path and need to downsize, your office lease will be like a noose around your neck
- 17:18 – In your greed to save money, do not end up defaulting on a contract
- 17:56 – Do NOT sign a long-term contract unless you can accurately forecast what your tomorrow will look like
- 18:30 – Not impossible to renegotiate or even get out a long term contract; for instance, you can find a sublease for your office space
- 19:20 – Delaying renegotiation might leave you with no wiggle room at all
- 20:02 – Cash flow: Watch it, manage it or lose it
- 20:08 – End of today’s episode
3 Key Points:
- The first step to saving money is knowing where you are spending it, and the second step is to determine where this money should be spent or not. Sometimes even a spreadsheet is an adequate way to keep tabs on your expenses.
- Negotiate really hard; the higher the expense, more you should negotiate.
- Do NOT sign a long term contract unless you can accurately forecast what your tomorrow will look like.
Boom! Hey! This is Steli Efti.
And this is Hiten Shah. And today, on the Startup Chat, we’re going to talk about cash flow. Right, Steli?
That is correct. You know, cash was one of my favorite topics, but I think so far on the podcast, we’ve mostly covered it from the “how to make more money” side of things. How to generate more cash. But you know, a very smart friend of mine and a very good entrepreneur once said, “a dollar saved is a dollar made.” So today we’re going to talk about the other side of things, which is like, cutting costs, saving money, managing the cash flow from both sides, not just from how much money you generate but also how much money is leaving your company. I thought that would be fascinating and we could probably drop some knowledge bombs here on people. So yeah, let’s jump right in. What should start ups do to improve their cash flow, to cut costs, to save money?
I mean, first you’ve got to know where you’re spending money, right?
That seems like a good start.
Seems like a good place to start.
I would say that … I know it sounds ridiculous but a lot of startups don’t know where they’re spending money. And I think there’s like… We can break this up into two super simple things, which is where are you spending money and then when you spend money, what’s your process of determining whether you should spend said money or not? Because that’s it. It’s sounds stupid, but you’re spending money. Can you save any of it? Can you spend less money? Are there alternatives that are cheaper to that expenditure? Right?
And then, the more important one, to not get yourself in the position to even have to evaluate this all the time is to make sure that when you decide to spend money, you have a process of evaluating if that’s the best way to spend the money or not.
That right there … Everybody who was listening, I want you to stop the podcast for a second and ask yourself, “what is my process for spending money?” I’d be surprised if people know exactly, I would assume that the vast majority would have to think through a few times they’ve made purchasing decisions, or spending decisions, and then write down reactively what that could look like if they called it a process. But my assumption is that most people and most startups, they just don’t have a process, or they’re totally unaware of how they made those decisions.
Yeah. In all my businesses there’s somebody owns a spreadsheet and the spreadsheet has all the expenditures and it’s being checked very regularly, and that’s an easy way to manage. And every time there’s a cost added to it, somebody is adding it to the spreadsheet. That’s one very brute force way, where even if you don’t have a finance person, or somebody like that, usually that somebody should be a co-founder, somebody who’s very responsible for it. Or, somebody who the co-founder manages directly and is able to do a check in regularly, or as you get larger, somebody in finance that a co-founder, or CEO if you’re in that situation, is able to basically talk to regularly. Because the thing is it won’t get managed. It really will not get managed. Your expenses, your money, if you don’t watch it. With cashflow, we’re just talking about management of money. We’re talking about something very basic you learned when you had a piggy bank.
So, I love the idea of the spreadsheet and of just even creating that level of transparency. It sounds so simple, but again I’ve never seen a startup do this. I’ve talked to so many, I know so many founders but I think that most of these companies, there’s a number of people in the company that can make purchasing decisions, they have a credit card or whatever, and if it’s a massive purchase, they might consult others but if it’s kind of a quote on quote “smaller”, whatever their definition is, for that specific startup, if it’s a smaller expense, people just decide, yes, let’s purchase this piece of software, yes, let’s just purchase this or that. This brings me to an interesting point. So putting everything on a spreadsheet and creating that level of transparency and also creating the simple process of, if you want to add an expense to this company, you have to submit it in the spreadsheet so that it’s transparent for everybody to see, question, ask and that alone, I think, can make a dramatic difference. Which brings up another point, which is the big expense and small expenses. I don’t know about you, but in my experience, different people tend to react differently to a certain type of expenses, you know some people care about all expenses and manage the cash flow really, really well and have learned that from a young age, maybe doing good piggy bank management as a young kid. But most people, as they grow up, they tend to have a very subjective interpretation of what kind of spending is too much, or wasteful and what isn’t. And these opinions can vary very widely between different people. One thing that I noticed early on between me and one of my co-founders was that I’m somebody that’s fairly careless when it comes to small expenses. If it’s less than $100, I don’t tend to really research and try to find a cheaper solution, I don’t tend to spend too much time in my mind, for whatever reason it seems like this is not an expense that’s important enough for me to spend a lot of time questioning it, or trying to save money on it and my co-founder is the exact opposite. He really pays detailed attention to the tiniest of expenses, but vice-versa when it comes to really big expenses, whenever we have to make a really big bet, he seemed to be very easy on making those decisions, and going you know what, let’s go all in, let’s buy this, let’s lease this massive office space and let’s go for it. And I’d be super conservative. I’m getting very nervous. The expenses of multiple thousands of dollars, I get very conservative, I get very, very careful about it. So we were always able to kind of balance each other out on that front, but I’m just wondering if you make any distinction between small and big ones. The bigger your company becomes, the more every little line item will matter and if you sum them all up, even if it’s tiny expenses, I’ve learned this painfully, they can make up significant amount of money. Have you noticed mistakes being done more on these big, bad expenses as startups, more of the small ones, or just equally on all fronts?
I see it both ways. I think your description was really good of mentioning that people think of money in different ways. A lot of it is based on their upbringing. I was joking about the piggy bank thing, but it’s kind of real. Everyone has gotten some kind of piggy bank, some kind of allowance, something to help manage money when they’re kids, somehow. Maybe even if it was 5 bucks for lunch, every day at elementary school, or whatever it is. There’s some management you’re doing, you just don’t know it. To me though, in a startup, in a business, I think the small ones and the big ones matter. Because like you said, the small ones add up, especially as the company grows, especially as more people can buy stuff. I was going to ask you about the $100, be like is that recurring $100, Steli, or is that like a one time $100? Because that’s an important distinction, right? Because $100 a month for a year is $1200. Again, I have a similar situation where … not similar but it’s similar in the sense of, we have a partnership. And for me there’s been somebody who actually is much more critical of the expenses than I am. So that’s been always great for me to have, because it’s very easy for me to either not care about any expense regardless of size or care too much about every little expense and I’m like a on and off switch on that. And so it’s nice to have someone who just always cares. I can flip-flop more than most people around most things, especially that, and so for me it’s, I don’t know, one day if it’s $10,000 I might be like, that’s cool because I personally can see the ROI of it, or if it’s $100, I’ll be like, why are we spending that $100? And I don’t like that about myself. I’d rather have a way better objective way to make a decision. And what I mean by “like that” is I don’t want to have that weight of having to figure that out all the time and having to adjust, so I tend to have somebody who can help with that. Usually it’s a co-founder. And they are so much stricter about that spreadsheet and managing it and asking me the questions of “our spending on this, is that good or bad?” In the beginning it was frustrating because I’m like, oh they don’t trust me. But what I realized they just care about the cash flow, so much as if my switch was on but my switch is now off and they’re the ones caring about that and that works out for me. So I think a lot of it has to do with the relationships and how different people react to spending money. That’s a lot, like I said, I really love what you said. A lot of it is upbringing and what your relationship with money is. I don’t think people realize that. Whenever you had to manage your money, usually never, I know that sounds weird but you make money, you spend money. Just basically spend less than you make. Oh yeah, don’t forget about taxes. It’s like, shit, the stuff adds up when you start thinking about all that and when you have a business you have to pay taxes, when you have a business you have to manage the money. When you raise money, you have to manage the money. If you haven’t raised money, you have to manage cash flow a lot more strictly, because otherwise you will run out of money. You might wake up one day and have a very little amount of money in your bank account if you’re not watching it. So to me, it’s like, log in to your bank account every few days, would be a good hack if we want to get into that. Log in to your bank account, look at it. Log in to your credit cards, look at them. Put it on your calendar to do that. Sounds so stupid, right, but if you’re wanting to not care about money force yourself to look at it. And then you’ll just start getting a habit of understanding what the ins and outs of your business are.
I love that. Since we’re on the side of giving some practical tips, let’s maybe think about some of the ways that we’ve been able to save a lot of money, or manage our cashflow better and see if there’s some general tips that we can give to companies. I’ll give one right off the bat that I think too many people are not doing this aggressively enough, which is, you need to negotiate really hard. The higher the expense the more you should negotiate. Just because you’ve negotiated in the past does not mean you can’t renegotiate again as your expenses go up. Especially when you work with infrastructure providers, if you use certain third party platforms that, as you scale your business, as you do more stuff, it gets more and more expensive. And this could be things like, infrastructure with AWS or whatever you’re hosting your service. And this can be a number of things that you use as technology infrastructure, where cost as your business grows can go up significantly, can be a shit ton of money and you don’t want to just take whatever the pricing is and be okay with it. No, you want to try to see if there is discount codes, if they do certain promotional things you could participate in to save some money. You want to establish a relationship there, go to their events. You want to engage with them on social media, you want to save any buck you can and you’d be surprised, especially with these infrastructure place when you start paying thousands of dollars a month, often times you can renegotiate and go back and you can get another discount or some kind of a bonus thing, and it can add up. We have saved tens and tens and tens of thousands of dollars with some of the service providers we’ve worked with just because we never stopped looking for ways to save money because we could see that every month, and year by year, we were spending more and more huge amounts of money. If you can save over an entire year, $10,000, $20,000 that’s significant money. That’s another $1500 to $2K a month that you could spend on something else, on ads, you could spend on giving somebody a raise, or hiring somebody or whatever else. Or just being profitable if that’s what separates you from profit and loss, but just negotiating much harder on these contracts is, especially the ones that could amount to a lot of money, and even if you have and it’s been like 6 months, 9 months or a year, and you’re not happy about the amount of money you’re spending, just send them another email. Give them a call and go, we’re not happy, we’re about to leave, although we’re becoming a bigger and bigger customer, these prices just don’t work anymore for us. And oftentimes when you say that, magically they’ll go, “Oh, you just slipped to this new range of customer that we can give another discount because of the volume you’re paying us now.” And magically, they find ways to save you some money to keep you happy and keep you around and that mostly will be insignificant to them, or not that significant, but to your company this can be … A ton of money can make all the difference in the world. So negotiate hard, and renegotiate. Don’t be afraid to go back 6, 9, 12 months later and say, this doesn’t work anymore, we’re paying more, more, more, we need to find a way to save money. You would be surprised how many times these companies are going to be open to doing that. Hey, you there Hiten?
Hello, are you still there? Hey buddy, you still there?
Yeah, I’m here.
There you go, sorry about that. I think I lost the connection for a second. What was the last thing you heard me say?
You were at the end of the description of getting people to lower the costs, and you had just finished the line about, you call them and then they tell you, hey, you’re in this new tier now.
There you go, okay. Yeah, so, the point is, negotiate and renegotiate contracts frequently if you’re spending more and more money with these service providers, you’d be surprised how many times they’re going to be open to coming up with some kind of a deal and bring down your costs significantly. And to them, it might not matter but to you it might be the biggest savings you can generate for your business.
Awesome. Yeah, I really like that one, I think … I mean, to me I think it’s like … I love what you said earlier, and this is why this episode is so important to anybody. Some people who are really finance geeks, so to speak, and financially minded are probably going to think everything we’re saying is absurd but that’s the minority of you out there, I know this. This idea that you haven’t seen any startup have a spreadsheet like that and all that, is super important. This is why we get so many calls, so many emails, you know, you and I or so many founders asking for advice because they’re about to run out of money. I think it’s absurd. No offense to anyone that’s ever been about to run out of money, that’s some serious shit, you’re running out of money. But it’s likely because you’ve been overspending in areas that you shouldn’t be.
Yeah. The one thing that I was thinking now, as you were saying that, is the … One thing that I want to bring up besides … Most of the things that we’ve covered so far have been, I think, very kind of fundamentals, basic things that are not that difficult to do but most people still don’t do it. And I think if you do these things, if people do these basic things when it comes to managing their cash flow and their finances in their startup, they’re going to have a much higher chance of not getting into trouble. There’s one thing that just popped up in my head as we were talking that I thought we should mention real quickly, which is long term contracts. It’s not that often that a start up will … You will be forced to sign something that’s more of a long term contract, but it can be something that gets you in trouble later on, obviously because of the long term structure of it. An office lease comes to mind immediately, but other things can come to mind as well where you are forced, you don’t have an option, you’re forced to sign two year or three year lease and everything looks good today but a year from now things are not looking great. Maybe you’re pivoting, maybe you have to shrink the size of your team significantly but now you still have this big office space, so you have this office space that you just don’t need anymore but you have this, kind of, signed contract. I wanted to touch on that a little bit, do you have any experience on these long term commitments financially, should startups just avoid them?
Don’t … Yeah. General rule is avoid them at all costs, except when you can’t afford to avoid them. What I mean by that is sometimes there’s just such tremendous savings and that is an impactful savings for your startup. That being said, what I see founders do is commit to a long term contract and then they don’t realize that they shouldn’t be committing to it because they’re going to run out of money and they’re still going to owe the money for the contract. So do some math. Because it’s a long term contract, you don’t want to deal with defaulting on a contract. That’s just stupid. Right? So, I see that because they’re just running so fast, and they’re like, “yeah, I’ll sign whatever, I need this service, or I need this or that or whatever.”
Yeah, so I agree with Hiten from today’s perspective and from the experience that I’ve had in the past. If you can avoid it, absolutely avoid signing any longer term commitments until you can forecast with accuracy, you know, long term what your business is going to be generating. Until you get to the point where your start up has a lot of stability and some scale and some predictability, makes no sense to lock yourself in to the future when you don’t even know what your tomorrow will look like. Try to avoid these at any cost. If you have already committed to them, again, coming back to the renegotiation part, just because you have a long term contract if you absolutely need to get out of it, it doesn’t mean you can’t. Often times, the type of businesses that do these long term contracts with others, they have to face fairly frequently that these people, these entities, these companies, can’t uphold themselves to these long term contracts so they’ve been in the situation before, they might have ways to help you either renegotiate the contract or get out of it or get somebody else into it, like if you have an office you could just find a sub-leaser, if you want to get out of the lease, or give you, like, a two month break on paying on the contract. There’s many, many ways to renegotiate when you are in a situation where you have to and unfortunately, too many times startups when they have these long terms contracts, they’ll wait until the very last second when they have no more wiggles room, and that’s when they go and approach the companies they have these long term contracts with. And usually that’s way too late. If you have a long term contract and you can see in the next few months, we might get into trouble cash flow wise, you need to aggressively approach every single one of them, today, and try to save money, get out of the contract, to find some kind of other way that’s positive for both sides and finding a compromise. But yeah, if you can, just don’t get into long term contracts if you are a startup, in general. It’s not a good idea, typically. All right, I think this is it from us for this episode, Hiten.
Yeah, cash flow. Watch it. Or lose it.
Watch it, manage it or lose it. That’s it from us for this episode, bye bye.
You got it. Later.