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Saving Money in Your Startup: Part 1

growing-money

Part 1: Where to work

 

We get it. You’re starting a new businesses and you’re strapped for cash. There are a million questions going through your head. We empathize with bootstrapping entrepreneurs and small-business owners everywhere, and today we explore meaningful ways (that add up) where your business can save money in the early phases. That said, every small-business owner and entrepreneur has a unique set of circumstances that pertains to their business, industry, strategy, and execution. Here we will outline some of the key choices, some obvious, some less obvious, on ways you and your small business can save money.

Where is your business located?

The cost of living cannot be ignored when you’re looking at starting a business. While the glamour of the big city lights and talented potential workforce might be appealing, it might not be the best place for you to start a business. The cost of creating a startup in San Francisco or New York versus a small town in the Midwest needs to be taken into consideration. Having lived in San Francisco, Los Angeles, New York, Chicago, and Madison, Wisconsin, it’s far easier to start a business in Madison, WI from a cost perspective.

Geographic Comparison

Let’s take a closer look at how the difference of geographic location affects your balance sheet. The average one-bedroom apartment in San Francisco rents for $3,140 a month as of June 2014 (according to data company Priceonomics). Annually, that’s an expense of $37,680.

According to Rent Jungle, the average one-bedroom apartment in Detroit rents for $751 a month. Annually, that’s an expense of $9,012.

The per-year difference in housing costs is $28,668. Think about how saving nearly 30 grand a year could help your business and extend your runway.

The Oracle of Omaha, Warren Buffett, would agree. If you have the flexibility to move to save money and find somewhere with a low cost of living and an educated workforce, it can greatly assist your business in getting started, growing, or keeping the lights on. We realize not everyone can pick up and move across the country, but consider real-estate options within your own town, as “fake it till you make it” is the fastest way for your startup to run out of money. The longer the runway you have, the better your chances of success.  When it makes good business sense, keep expenses low.

Where You Should Work: Office Space vs. Coffee Shop vs. Co-Working

Keeping overhead expenses low is one key way to improve your chances of starting a successful business. For recent college grads, starting a business while living under mom and dad’s roof may be one of the best times to do it. Whether or not they are pushing you out the door, you have more of a safety net to try and start a business when you aren’t paying rent. Merely looking at the statistics, more and more college grads (as high as 85%, according to CNN Money) move back in with their parents after college. If this is you, you have a window to start a business where your overhead is as low as it will ever be.

Nowadays, depending on your type of business, you have several options for where you can work once you’ve found a place to live: a traditional office space, coffee shops, and co-working spaces.

Traditional Office Space

For decades, getting office space was synonymous with starting or operating a small business. Over the last few decades, we’ve heard about the Googles, Dells, and Apples of the world that started off in a dorm room or in someone’s garage. And while running a business out of an actual garage might not be your cup of tea, the symbolism is not to be ignored. The goal? Keep overhead expenses as low as possible until the business is generating a steady revenue stream, at which point it makes more sense to plow some money back into the business.

While the idea of getting a physical office space is something to consider, it’s not a necessity for all businesses these days.

Advantages of renting office space

  • Does your startup need exclusive space to call its own? If so, getting office space might be a good investment.
  • Stable location and address for your business
  • Ability to keep folders, files, and work stuff at the office
  • Signage and visibility
  • Full autonomy to make business-specific changes to the space you’re in (as long as it’s in accordance with your lease)
  • Set your own hours
  • Keys and added security

Disadvantages of renting office space

  • Usually locked in to a 12-month lease
  • Credit risk of being on the hook if the business doesn’t become or remain profitable
  • Expenses for electricity, Internet, and other infrastructure needs
  • Cost to invest in furniture, chairs, copiers, and supplies

Coffee Shops

The Real Math of Coffee Shop “Free Internet”

A grande (medium) latte at Starbucks in New York costs $4.30, while that same drink costs $3.55 in Detroit. Here is a comparison of the prices of Starbucks lattes in cities across the world. Again, as mentioned before, each city is going to have a very different cost of living, which will affect you and your business. Being conservative, and using prices in Detroit, one latte a day five days a week would cost you $71 a month.

That’s for one drink a day, not including food or anything else you purchase at the coffee shop or taking into account gasoline or transportation costs to and from the coffee shop. If you’re anything like me, my coffee shop visits usually included multiple drinks along with snacks, which functioned as fuel and pseudo-meals to keep me going. There were days I easily spent $20 a day on caffeine and snacks. $20 a day five days a week runs you $400 a month. For a budding entrepreneur or small-business owner, that money is better invested elsewhere.

Coffee shops are also limited for what resources they can offer the entrepreneur.

Many entrepreneurs or small-business owners need to make phone calls, copies, or hold meetings, which can be challenging in the coffee shop environment. Some business calls are not appropriate being held in the coffee shop setting (for privacy reasons), and respecting the other patrons at the coffee shop is also something to keep in mind.

I have been in coffee shops numerous times where I have witnessed an important business meeting being held next to a table with distracting small children or a conversation that interfered with the meeting.

Coffee shops do provide comfortable seating and access to caffeine and Internet, but it’s important to think about what the benefits and limitations of coffee shops are before evaluating if that’s the best out-of-house exit strategy for you and your business.

Advantages

  • “Free internet”
  • The ability to get out of the house to work
  • Easy access to snacks, coffee, and (usually) restrooms
  • Save money on tables, desks, Internet, and other office costs

Disadvantages

  • Distractions from other patrons
  • “Hidden costs.” A latte or two and eating out every day can add up.
  • Hours are limited to coffee shop hours
  • Lack of privacy
  • Inability to answer important phone calls
  • You must take your stuff with you when you leave

The Co-Working Option

As a co-founder of the co-working space 100state in Madison, WI, we have unleashed a new model of bootstrapping entrepreneurship, innovation, and how to live, work, and give back to our community.

At 100state, we house about 150 entrepreneurs and consultants. The most common reason why people join is a sense of community and a (reasonably priced) place to work. Many of these entrepreneurs had been previously working from home or in coffee shops. As an entrepreneur, working from home seems like a promising idea. No mandatory work attire and complete control over when you work. I worked from home for about three years. While I saved money on office space, at times I suffered from a lack of discipline, and at times I sorely missed the ability to bounce ideas off a co-worker and learn from the information overspill of what the person next to me was working on.

The next logical step for me and most work-from-home entrepreneurs was to get out of the house. You want to find a place to be able to get some work done — with comfortable seating, Internet access, and a space to clear your mind from anything and everything going on at home. Enter the coffee shop. For the better part of the 90s and early 2000s, with the growth of the Internet, coffee shops were heaven sent for entrepreneurs who needed to get out of the house for a couple hours a day (or longer) to get some work done. The market for Starbucks and other Internet-friendly coffee shops boomed as coffee shops evolved from merely a place to grab coffee and gather socially to the new home office for thousands of consultants and entrepreneurs. As outlined above, there are advantages and disadvantages to coffee shops.

Is co-working for you?

Co-working is a style of work where individuals and small companies share a community office space.

Most “co-workers” do not work for the same company, though the co-workers often share resources, ideas, and connections for a monthly membership fee. Most co-working spaces provide Internet access, restrooms, access to copiers, and other small-business needs.

I just spoke with one of our co-workers who recently started an electric moped company called Flux Mopeds, and they are looking for innovative ways to market the product and increase sales. We spent 30 minutes brainstorming, discussing sales, marketing, and potential strategic partnerships to help grow the business. It was a nice break from what I was working on and I’m always happy to share my ideas with fellow co-workers. By being part of a co-working community, Matt gets to leverage not just the physical space of the co-working community but also the brainpower of other co-workers.

When was the last time that happened to you at a coffee shop?

Most co-working spaces cost $50 to a couple hundred dollars a month. When factoring in the saved cost of caffeine and unnecessary purchases to justify the coffee shop loitering, the savings can add up, not to mention the intangible value adds.

While co-working is an opportunity to save money, there are other reasons it may be a smart financial decision for your business.

One of the reasons I mentioned Flux Mopeds was to highlight the additional benefits of being part of a co-working community. Connections and resources.

Most small businesses and entrepreneurs are limited with financial and human capital resources and are always in search of the right connections to run and grow their businesses.

Advantages of co-working

  • “Free Internet”
  • The ability to get out of the house to work
  • Co-workers to exchange ideas with
  • Laid-back environment
  • Save money on tables, desks, Internet, and other office costs
  • Cost-effective, usually $50-$150/month
  • Office chairs, desks, and basic supplies are usually provided
  • Conference rooms to use for meetings

Disadvantages of co-working

  • Limited hours. Some co-working places do not allow 24/7 access.
  • Lack of privacy
  • Potential lack of professionalism
  • You may need to take your stuff home with you every day unless there are offices or dedicated desks available for rent.

Check out co-working spaces in your area to see if you can find one that fits your needs. It’s good to assess privacy, a place to take phone calls, hours, and other things that may be important to your business. Visit: www.desktimeapp.com to locate a co-working space near you. If that doesn’t produce your intended results, you may want to Google your city (and state or zip code) + “co-working.”  Most co-working spaces let you come visit for a day or buy a day pass, which is a good way to check out the environment before committing.

Summary

Managing your company’s expenses, especially when just starting the business, is essential to keeping your business solvent. We focused today on location-based solutions to save your business money. A quick recap…

Find a city where overhead costs are manageable for you and your business. If you’re a recent college grad, there’s no better time to start a business (assuming you have an idea or experience) than when you’re living at home with mom and dad.

Consider all your options before investing in office space. Most office space requires a lease and 12-month commitment. Most startups and small businesses have a degree of cash-flow uncertainty, so minimize your risk by exploring coffee shops and co-working spaces until your firm has smooth and predictable cash flows.

 

Go to Part 2: Click Here

This was originally posted at The Simple Dollar.

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