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Rules for Entrepreneurs #4 – 5 Ways to Avoid Small Business Death by $100 Expenses

by Steve Fisher on April 17, 2009

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broken-piggy-bank-smallWhen I started my first business as an adult and left the warm blanket of a steady paycheck I also left the fuzzy fun of expense reports. Those detailed reports on excel spreadsheets full of stapled pages of photocopied receipts that we got paid back on eventually (usually in 2-4 weeks) and were part of the work experience when you traveled or did anything company/client related.

Back then they were a tedious chore because I really wished I had a corporate credit card but that was only available to the executives. However, I never noticed how those expenses added up because they weren’t mine and they were usually billed back to the client.

Then I launched my first business.

Eyes Wide Shut

I started my own business and my eyes were wide open – shut to the realities of how quickly things add up. I thought I was being conservative and budget conscious but I was still doing lots of business lunches, buying lunch for the team a few times a week, paying for drinks on Friday because I thought I was the “cool boss”. We sponsored various events at small levels because we were more concerned with seeing our logo out there than actually demanding that there be some type of measurable return. Very soon the $50 here, $50 there, $100 for this sponsorship, $250 for that sponsorship and lots of $75 for happy hour rounds started to really add up and we were spending $2000-4000 a month for non-sensical things but it didn’t stop until the party was over and we burned out.

Burn Rate? More like “Burn Out Rate”

You might have heard of the term “burn rate” during investment conversations and discovered that it is the amount spent on a monthly basis that you burn through and includes fixed and estimated variable expenses. The purpose of knowing this number for investors is to understand how much money you would burn based on the level of growth as you scale up to reach certain revenue/customer milestones. This concept can be applied to any business regardless of whether you get outside investment because it will be readily apparent in a cash flow statement when you would run out of money based on current operations if you are spending more than you earn. When I started the business, I had a fair amount of savings stocked away and as I ramped up and felt that I need to quickly scale to “run with the bulls” so I felt I was spending money to make money. Really I was just spending money. Clients would sign with me regardless if I took them to a coffee house or a fancy steak house.

These little expenses felt like paper cuts that all together were causing the company to bleed out and be on the verge of death. Things had to change.

5 Ways to Avoid the $100 Business Expense “Paper Cut Bleed Out”

Paper cuts are unexpected and happen in the worst places. The shallow ones sting and bleed a little bit. The deep ones bleed a lot more than you think. If you had 100 or 1000 of them happen at once, you could actually bleed out and die. I apologize for the morbid description but there is no better analogy than a paper cut.

We realized that since we were like most companies that did not have investors, our high burn rate was leading us down the path of burning out. We decided at that moment that we must first get our expenses under control then evaluate or correlate expenses to things that helped our business grow. We came up with five simple ways to make things work:

1.) Know your burn rate

2.) Question the expense before you spend it

3.) Budget for recurring expense amounts each month and keep it in check

4.) Find cheaper alternatives to off site meetings – If you meet a client off site, coffee is much cheaper than a meal and really cheaper than rounds of cocktails

5.) Get your employees to think creatively and reward them with saving the company money – if they can save $500 for you, give them $50 extra

How Have You Prevented Burn Rate “Burn Out”?

These five ways seem like no-brainers but you would be surprised how hard it is to actually admit you have a problem and understand the depth of it in order to make the change.

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