How to Reduce Your Business Costs in a Crisis: Checklist for Startups

Updated on :June 15, 2024
By :Igor Izraylevych

When the world economic crisis is around the corner, businesses of different sizes across various industries should prepare for turbulence times. This period doesn't inevitably mean we must apply all the crisis management artillery, but anticrisis precautions might be beneficial for all businesses worldwide. 

Since startups are now the first to feel the impact of a recession, we'd like to support them in this challenging time and share our expert tips on managing cash flow during the crisis. These helpful yet straightforward practices will help you recalibrate your budget to account for new realities and survive a long night of the Coronavirus recession.

What Is a Profit and Loss Report (P&L) and Why You Need It?

Profit and loss

Illustration by Mia Ditmanson

The definition of a P&L report

The profit and loss report is a financial statement that summarizes all the revenues, costs, and expenses incurred in a specific period. It shows your Net profit (or loss) based on your monthly income and expenses that commonly include salaries, commissions for sales managers, office rent, advertising, office supplies, insurance, taxes, utilities, and so on. 

For technology startups and online businesses, this report should also include the obligatory expenses, such as costs for domain name maintenance, hosting services, and different certificates needed to keep your website available for the end-users and potential customers. It is an expense item that shouldn't be exposed to a policy of cost reduction regardless of a crisis. An online presence is vital for business survival in a crisis, so make sure that you have everything well-managed when it comes to the availability of your business in the digital space.

Why a P&L report is particularly important during a recession?

The P&L report also reflects the ability or inability of a particular business to generate profit by increasing revenue, reducing expenses, or doing both. This report is beneficial for managers and business owners who need to evaluate the company's chances to overcome a long-months recession. It transparently reflects all the funds operating in a business and provides all the necessary information to come up with some expense cutting strategies.

It allows you to review your overall budgets for a certain period and forecast both the worst and the best financial outcomes for the nearest time. A P&L report provides insights that will help you adjust your budget and reduce expenses taking into account the revised expectations of your customers and the business costs needed.

How to create a P&L report?

Are you wondering how you can create such a report on your own and what should it include? This information might be particularly helpful for startups that don't have their own accounting department. To make things easier for you and unload your mind from too many explanations, we have prepared this free profit and loss report template for you. It will help you make sure that you've included everything needed to see your startup's financial situation more transparently. This template will allow you to classify your budget expenses by different categories and define whether all of them are used efficiently. Interestingly, you can also invest in a expense management software or accounting software to manage your money flow.

Why Saving Now is Crucial for Earning More in the Next 5 Years?

savings for startups

Illustration by Diana Dyak

Startup and small business predictions for the near future

As indicated by the U.S. Chamber of Commerce, nearly a quarter of all SMEs have already shut down temporarily. Data from the Bureau of Labor Statistics says that only 50% of startups and small businesses will remain in the market in the next five years. So, what should a startup know to get into a successful part? 

No one is sure on the length of this crisis. The only thing all forward-thinking businesses realize is that they should prepare for the worst scenario possible. To be well-informed and prepared means to be armed. Despite all the hardships considered, this time might be also a springboard for wise startups into a new, prospering economy. However, smart cash flow management is an obligatory requirement for this.

Expense reduction is a required step

Business expense reduction is a required step in developing contingency plans that will help you withstand the next quarters. Sequoia Capital, in its memo, recommends getting ready for extending the company's runways in order to stay afloat now and enter the age of the new economy later.

In common, companies with 3 to 6 months' worth of cash at closing have good chances to survive the crisis. Startup Genome has recently reported that 41% of startups have less than three months' worth of money available. This research is based on a survey of 1,070 respondents across 50 countries conducted from March 25 to April 17 this year by the Startup Genome. 

To efficiently and accurately manage your expenses, there are expense management software, expense report software systems that come in different price variations. There are free and open source software too that startups can think of.

It is one of the grim statistics related to a pandemic, and it shows that many startups are now vulnerable and need to take urgent crisis management measures. Smart budgeting is one of them. Today, we would like to share the four effective cost-cutting practices that can help startups cut their expenses wisely without any business damage. 

Simple yet Proven: 4 Cost-Cutting Strategies for Startups

Cost cutting strategies

Illustration by Felipe Andres

Cut spendings on non-essential things

You might inquire what do we mean under the "non-essential" spendings? These are business expenses that commonly seem to be non-substantial, but if you sum up all of them, you will see that they take a huge part of your budget. They include some additional but not vital office stuff that might be broken down into the next categories:

  • goodies (coffee, tea, cookies, Nesquik)
  • stationery (paper, pencils, notebooks, etc.)
  • celebrations (employees' birthdays, team-building events, the company's birthday, and other corporate parties)
  • corporate fitness packages
  • paid courses for employees. 

Surprisingly, you can save cutting the expenses for "non-essential" things. Of course, it should be just temporary changes. Every company decides on its own which kind of non-essential expenses is better to reduce. There are no particular recommendations regarding it. It's also advised to openly communicate about all the changes with your employees and let them know why you should incorporate them.

Rent a more comfortable office for a lower cost

Haven't you planned to move to another office next month? However, what if you consider it as part of your cost-reduction policy and a crisis-management technique required in the current conditions? Today, it's a perfect time to look for a cheaper and probably even more comfortable office. 

The recent Coronavirus lockdown followed by a global economic recession has become a substantial reason for many startups to freeze their projects while other businesses have been forced to close. Consequently, the real estate market has become crowded with offerings for cheap office rentals. The office owners also understand that companies aren't ready to pay for offices like earlier. It has caused a decrease in prices. Signing an agreement for a long-term office rental, you will ensure significant business expense reduction for the next months.

Rental software

Communicate with a team openly

Effective communication is crucial for every business process. However, when the situation is exaggerated by a crisis, it becomes vital. The downturn is a stressful time for both business owners and employees. While entrepreneurs are concerned about how to keep their businesses operating, employees feel anxiety regarding their jobs and a financial situation. 

That's why it's essential to communicate with your team openly to keep it timely updated about your company's current situation and financial forecasts. Talk to your employees honestly and let them know about your plans related to incorporating some crisis management precautions and possible expense reductions. 

It's known that businesses that inform their staff about the actual state of things in a company (even if the truth is unpleasant or even frightening) see the rise of the team morale and more productive team collaboration. Consequently, communicating with your employees about the cost reduction policy in a current tough situation, you will avoid not only the undesired employees' reaction and lower team spirit but will also increase productivity. Collaborating, sharing, and communicating with the team is much easier with some of the best Collaboration software solutions.

Temporary salary reduction as a critical precaution

The employees' salaries are the biggest expense item in every company's budget. Mostly, companies strive not to change salaries even in a crisis. However, if the situation is critical, and you see that a company will not survive even several months if you change nothing today (not to mention six months that are usually needed to come out of a crisis), the slight salary reduction can be a solution. 

Jack Kelly says in his article on Forbes: "Even CEOs are cutting their own salaries in response to the Coronavirus. Some top executives have agreed to take salary cuts and have pledged to not enact any layoffs."

There are even incredible cases when CEOs cut their pays to $0. It is a highly undesired but necessary action if the crisis situation still is gaining momentum in a company. Of course, it must be only a temporary change, and after a clearly predefined period, all the salary quotes should return to the pre-crisis rates. To incorporate this practice as less stressfully to your employees as possible, we recommend calculating the decrease in salary rates by the percentage that depends on the employee’s position and experience. For example, you may reduce the salary for senior managers by 5%, while it might be just a slight decrease of 2% for juniors. Interestingly, managing money efficiently and effectively is easy with the right Budgeting software.

How to Estimate Business Resilience in Times of Crisis?

Business resilience in crisis

Illustration by Julia Wu

It's particularly important to estimate your business resilience in times of recession. This can be a part of your business strategy regardless of a crisis. It allows you to always be ready for the worst scenario and start smart budgeting according to your already prepared and well-thought crisis management plan. 

Here, we provide a short guide on how to estimate your business resilience in a financial downturn and calculate budgeting for the next months. So, let's turn back to the concept we have started with — a profit and loss report (P&L). You should create a detailed P&L report that includes all your company's revenues and expenses calculated over a particular period (for example, a month or quarter). 

Considering data provided by your current P&L report, you should develop financial forecasts about how long your business can operate with the same monthly expenses and income. You must take into account that the flow of clients may be drastically decreased, as well as the cost of projects your team may be involved in. The best advice is to prepare for the worst outcome. 

In case if according to your predictions, your business will function as previously for the next six months (congrats!), your company has excellent chances to survive a crisis without significant losses. If your forecast is not so positive, your company (as well as most of the market stakeholders) should re-evaluate your budget and create a P&L plan with predefined expenses for the next month. 

You should investigate all expense items, define in which areas you can cut spendings less stressfully, and calculate the desired rates of expenses for a critical case. 

Remote work software, Remote support software, are some of the software solutions that companies can try out to manage their teams remotely.

Conclusion

The current recession is a challenging time for all of us. It helps us learn lessons about digital transformation, crisis management, and smarter budgeting. The last one is particularly important for business survival. Companies across different verticals and industries are now actively rethinking their business models and adjusting financial plans to the new normal. It is time when every startup should be well-informed about possible crisis management and budgeting techniques to be able to stay afloat in the market and survive a crisis. Re-inventing, and not allowing the situation to derail you is the need of the hour and this can be achieved by using systems like; Business management software, and  Risk management software.

In this article, we have shared experience-based insights and helpful yet straightforward practices that can help startups extend their runways and ensure easy entering the new economy.

Igor Izraylevych
Igor Izraylevych

Igor Izraylevych, CEO and co-founder of S-PRO, has an engineering background and more than 10 years of experience in startup advisory and product development. Igor is passionate about the fintech industry, new technologies, and ideas. 

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