How to Reduce Startup Expenses when Launching a Business


Most people who are launching a business underestimate the time, money and effort required in the initial stage. They end up spending more time and money than they had initially planned. While they are working hard to put everything in order to start the business on-time; the bills continue to pile up and it comes as a shock when they examine the total expense incurred before the money has even started coming in. This is just one of several reasons why an early investment in a good professional tax and accounting software platform is crucial.
There are good reasons to reduce your start-up cost. The less money you spend before you open your business, the more money you will have for advertising and promotion; which is crucial in the early stage. Besides, it will allow you to set more money aside for working capital; which is particularly important for first few months.

Major expenses during the start-up phase fall into these categories:

  • Equipments
  • Furniture and fixtures
  • Security Deposits for utilities, building, etc.
  • Start-up inventory
  • Marketing, advertising and promotion
  • Insurance
  • Licenses and permits
  • Building improvements
  • Legal, accounting and professional fees

Some of the expenses are fixed and there is not much you can do to bring them down other than managing with a tool such as expense management from Workday However, many of the other expenses can be eliminated, reduced or deferred by taking actions we have outlined below We compiled this list based on our experience with business colleagues. We have highlighted the expense categories that can be acted upon in bold.

  1. Lease instead of buy – This is perhaps the most important action you can take to reduce the startup expenses. This action applies to several expense categories including equipments, furniture and fixtures. As a new business you will need to buy number of these items whose cost can easily add up to several thousand dollars. You can avoid this expense by leasing instead buying them outright. Another benefit of leasing is that you can deduct the expense, thus reducing your tax burden. Otherwise, when you buy equipments IRS requires you to put them as assets and amortize them over several years.
  2. Pay monthly instead of lump sum – Several expenses, such as insurance and bank charges, give you an option to pay annual premium upfront or on a monthly basis. You need to pay additional nominal fee if you choose the monthly option. Our advice is to go with the monthly option even if you have to pay additional fees. This will save you large upfront expense; which can be deployed for better use.
  3. Avoid paying deposits – This applies to several month deposits you have to put up for utilities (electricity, gas, cable, etc.) and building rent. While they do not amount to large sum any amount saved in the early phase is valuable. You can avoid paying deposit by putting showing good business credit or even using your personal credit history to assure the providers that you will be able to pay monthly charges without any problems.
  4. Buy used equipments instead of new – As any car buyer knows, the value of a new car goes down the most in the first few years. The same principle applies to large expenses you need to incur for equipment purchase for the business. You can take advantage of this fact by buying used equipments that are still in good working condition instead of buying new ones. You should look for equipments that are only few years old and have them checked out by technician. Some manufacturers also have certified used equipment programs that you can take advantage of.
  5. Defer payments as much as possible – While you should take this action anytime it is even more applicable in the startup stage. You will be spending considerable amount to stock up initial inventory of many items. You should talk to the vendors to defer payment of these as much as possible. It may be difficult to do it when you are just establishing credit with them; but they may be willing to do so to get long-term business from you.

We hope you can take advantage of these suggestions to succeed. Feel free to add your suggestions to this list in the comments below.

Image Courtesy:   roland

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Comments

  1. The article is good!! Startup expenses can be controlled by outsourcing some non strategic functions so that time and cost for setting up a full fledged deptt for the same can be controlled.

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