Startups don’t grow in a straight line. In the initial phases, founders have a budget and burn rate in mind, only to encounter unexpected expenses that throw things out of whack. These expenses might look foradoable at first, maybe you need to bring on an employee for a new initiative, fix a product bug, handle a lawsuit, or upgrade your stack. But unlike large companies, which have a big financial buffer, startups don’t have that wiggle room. It is up to the founder to keep costs under control. How they react to these expenses will determine whether or not the company hits its targets.
Build a Financial Cushion Early
So, the first way to handle uncertainty is to plan for it before it occurs. Having some cash in the bank and/or a few months of operating expenses prepaid can make a huge difference. This fund helps smooth out the ride when things go wrong. It’s strongly advise founders not be paranoid about keeping some of their startup’s capital in reserve rather than immediately reinvesting it in growth. There is great value in having some runway and making more thoughtful decisions.
Separate Essential and Non-Essential Spending
Not all expenses are created equal, and startups with a limited budget should know where to spend early on. Essential expenses are costs required to develop the product, retain customers, and maintain core operations. These are costs you need to pay today. Non-essential expenses (e.g., advertising, PR, employee perks) are costs with potential value, but they should generally be avoided when uncertainty exists. By making this distinction, founders will know what to do in an unplanned expense situation and know that basic operations will be funded.
Maintain Clear Visibility Into Cash Flow
Understanding cash flow is key to handling unexpected expenses that can arise as a founder. Having a solid grasp of how your company is bringing in money and where it’s losing it means you can plan for major expenses. Tracking your cash flow will also highlight any spending patterns that may lead to unexpected variability in future revenue. And by understanding the cash flow of your company, you’ll be better able to handle the unexpected expenses that are inevitable in any role.
Plan for Short-Term Liquidity Gaps
Even with the most sophisticated financial planning, businesses frequently face unexpected expenses that exceed their available cash. In these situations, having access to liquidity options that can provide short-term funding can go a long way in helping a business remain stable and secure. Although these funds should not be used on a routine basis, same-day emergency loans can play an important role as a crisis funding solution, enabling a company to meet payroll, fix broken equipment, and handle other immediate operational issues. While these types of funds should not be relied upon in mainstream financial operations, they should be integrated into financial modeling on an occasional basis to provide much-needed liquidity when it is most needed.
Prioritize Revenue-Generating Activities
Instead of rapidly cutting costs, founders should focus on strengthening revenue by improving conversion rates, customer retention, and accelerating sales cycles. Attacking challenges with a revenue-first mindset ensures your company is better equipped to withstand unexpected expenses and even continue growing at the same rate as other companies in similar circumstances.
Negotiate and Adjust in Real Time
Smaller start-ups have much more flexibility than larger companies, and founders can use this to their advantage when unexpected expenses arise. This might mean negotiating payment terms with vendors, revising contracts with partners, or revising previously agreed-upon terms to create some much-needed breathing room. Most vendors will be willing to make reasonable accommodations to support the start-up’s long-term success, and founders can take a lot of the pressure off by being proactive and transparent about the company’s situation.
Avoid Overcorrection
Founders facing uncertainty about expenses mistakenly overcorrect for the unexpected. Such overcorrection can cause permanent damage from hasty cost-cutting initiatives such as scrapping strategic efforts or unfairly reducing headcount. It is important to control costs, but do so in a measured fashion and always in relation to the company’s overall strategy. If not, you can easily become too lean, which can inhibit future growth.
Use Data to Guide Decisions
When finances take an unexpected hit, founders need data-driven decision-making more than ever. Decisions about cost-cutting, fundraising, and new features need to be informed by real numbers, not just assumptions about your customers and business. Look at how users are behaving, and at trends in revenue and efficiency to make the best possible decisions. Not only will you be allocating resources more wisely, but you’ll be gaining confidence in your financial plan and more reliably achieving your goals.
Build Flexibility Into Your Growth Strategy
Amidst early-stage rapid growth, one never knows what curveballs will come next. Thus, being too rigid with financial plans can be calamitous, and owners must attempt to remain as flexible as possible. Making sure that budgets and forecasts are as current as possible, developing a robust contingency planning approach, and consistently re-examining plans regularly allow for some certainty in a landscape with very little. While best-laid plans rarely pan out exactly, remaining nimble along the way can create valuable advantages as the company evolves over time.
Conclusion
Your first few years of growth are going to throw a bunch of unexpected expenses at you. But with smart financial planning, good visibility into your cash flow, and a focus on driving more revenue, you can handle them. Leaving unexpected expenses unchecked means missing opportunities to build more resilience in your business, which allows you to continue growing at a faster pace.
