At What Price?
This story appears in the February 2004 issue of Startups. Subscribe »
When times are tough during start-up, you may be tempted to cut every expense under the sun to keep your business afloat. Beware, though-cutting the wrong things could end up hurting your business in the long run. Paul Rich and Seymour Siegel, principals of New York City CPA firm Rothstein, Kass & Co., weigh in on the types of cost-cutting start-ups shouldn't do, as well as the types they should. Listen up.
- Cost-Cutting Mistake No. 1: Choosing cheaper materials for your product. "I know of a company that was selling a garment and chose to use a cheaper material than the material used [for the prototype]," says Rich. The finished garment was not as colorfast as the prototype. "[The owner] had the whole order denied after he delivered," Rich says, "which cost him a fortune."
- Cost-Cutting Mistake No. 2: Cutting back on advertising and marketing. Getting the word out about your company in the early stages is necessary to success. You may modify advertising (i.e., switching from color to black and white) but don't eliminate it altogether, say Rich and Siegel.
- Cost-Cutting Mistake No. 3: Not doing inventory or financial reports when times are lean. "[Entrepreneurs] say, 'We don't need to do this-let's rush; let's not close the [store] for a day,'" says Rich. "[But] without taking inventory, they don't know with certainty if they're making the profits they think they're making." Whether you make provisions to do inventory while your start-up business is open or after hours, the extra expense of time and even extra workers is well-spent.
- Cost-Cutting Mistake No. 4: Cutting R&D during the start-up stages. Make sure you spend judiciously, Rich notes, but don't eliminate R&D altogether: "[For] a start-up, that's what the whole future depends on."
- Cost-Cutting Mistake No. 5: Cutting anything that keeps a customer satisfied. "If you're cutting a cost that will interfere with customers' well-being, their delivery time, the product quality, the communication or anything else having to do with the customer," says Rich, "you're making a mistake." Cut administrative costs instead-renegotiate shipping fees, telephone rates, vendor payment schedules-anything but customer service. Says Rich, "Cut all around [the customer], but don't cut [the customer]."
The bottom line, say Rich and Siegel, is to position your company for success from the outset. "It doesn't make sense to cut down on those things that drive your product to the customer," says Rich. "If the economy turns or your industry turns, you won't grow with the rest of it."
Lessons From the Edge:
Survival Skills for Starting and Growing a Company by Jana
Matthews and Jeff Dennis, with Peter Economy (Oxford University
Press). This compilation of true entrepreneurial
stories, dealing with everything from money and partnerships to
natural disasters and personal tragedies, provides real-life
lessons told from the entrepreneur's perspective, along with
insights from the management expertise of the authors.
You Need to Be a Little
Crazy: The Truth About Starting and Growing Your Business
by Barry J. Moltz (Dearborn Trade Publishing). Moltz
goes for the straight-talk approach with his personal anecdotes and
conversational style. A serial entrepreneur himself, Moltz
discusses how being "crazy" is the only way to survive
the difficult realities of starting a business. This book also
includes brief profiles and interviews with other entrepreneurs.
Word to the wise: Sugarcoating is not on the agenda.
Success at Life: How to
Catch and Live Your Dream by Ron Rubin and Stuart Avery
Gold (Newmarket Press). Written by the leaders, or
rather, the "ministers of tea" at The Republic of Tea
Inc., a company that sells premium teas, this book details how to
find your passion in work and business with ancient wisdom and
modern interpretation. Read this book if you aspire to be a
"Zentrepreneur," which the authors define as "a
person who creates a business and a life."
