Tightening Your Belt

In the wake of the Thanksgiving weekend, this post could be about something else. But I’m talking about getting a handle on your company’s spending.

A number of our portfolio companies have recently reviewed their spending (largely without any prompting from their board and investors!) and have concluded that things got a bit out of control. It is amazing how easy it is to take costs out of your business after two or three years of hypergrowth where the focus was on hiring, growing, expanding, and retaining the team.

In many cases, these efforts to reduce spending have been done without impacting headcount. There are a lot of vendors who can be renegotiated, replaced, or done without. In other cases, companies let attrition happen without replacing everyone. And in other cases, companies choose to part with folks who are not working on things that are truly critical to the business. In all of these cases, our portfolio companies have found that they can continue to hit their goals with a lower spend. That, in and of itself, is an important realization for an organization.

The thing of it is that most employees appreciate it when these hard decisions are made. They run their own personal budgets and understand the concept of tightening the belt too. They feel better when their employer is making hard and important choices. Many managers worry about the signal they are sending when they go through belt tightening. It can be a negative signal if it isn’t explained properly. But it can be a very positive signal when the proper context is placed around the spending cuts.

When the business becomes profitable more quickly, when the cash runway extends by a year or more, when the budget is no longer stretched and new initiatives are now possible, the team understands the value of belt tightening and embraces it as much as the investors do.

If you’ve been a growth spurt for the past few years and have not taken the time to do some belt tightening, it might be a good time to do that.


Comments (Archived):

  1. William Mougayar

    It’s part of the continuous organizational tune-up for growth. On average, the bottom 10% of your employees are not very productive and letting them go may be a good thing, as it tightens productivity elsewhere. When you’re 12 people, there is no room for slack, but when you’ve grown fast to 50-150 people, I can assure you that a re-tightening is a good thing.

    1. awaldstein

      Agree on one level that there is always a gap at the bottom. Our experience agrees here.On the other hand though not.If you are cycling out 10% of your employees on an annual basis or on any cyclical yardstick you are doing a poor job of building your company whether you have 10 or 100 employees.Done many layoffs but never anywhere near those numbers on a cyclical basis.

      1. Matt Zagaja

        This is where it’s probably important to have your yardsticks ready. Sometimes the most productive employees do not have bandwidth to pick up the slack, and also it is sometimes not possible to find superior replacements to what you have.

        1. awaldstein

          Building and managing your teams is truly an art.Lots of tactics and rules of thumb but just really hard work to get right.

      2. William Mougayar

        well, i used 10% as an example, and it may be aggressive for an average (but have seen it). maybe 5% as average. yes, it goes back to the quality of management. Greatly run organizations and startups have more top performers and less low performers. And that applies to budgets too.

        1. awaldstein

          I understand what you are saying but questioning any management structure that on a regular basis admits to 5-10% churn of human and cultural capital.This is not about the spread of human capability which I agree with.It is how you manage to that in building teams.Not the same thing.

        2. jason wright

          the Romans had a word for it. Decimation.

          1. PhilipSugar

            Exactly what it will do to your company.

        3. Stephen Voris

          The problem is the percentage mindset – grading on a curve is dangerous in business and academia alike, as it encourages coasting at the top and backstabbing near the bottom. Far better to have objective standards when you can get them.

          1. PhilipSugar


          2. William Mougayar

            I didn’t mean to imply that the % number is the driver for these decisions. It’s rather the employees who are not performing that are. Whether that ends-up being 1%, 4% or 8% is irrelevant really. In sales for example, when you have 12 sales reps, and only 2 of them finished at 48% of quota, whereas the others did more than 100%, unless there are really special circumstances, I would replace these last 2 sales reps.

          3. Stephen Voris

            And those are objective standards, agreed.Bit of a nitpick still on the relevance of what the percentage ends up being – switching positions, if you will: the higher the percentage ends up being, the more likely it is that you should have done it earlier.

          4. William Mougayar

            not meant to be a hard % number. Maybe a range… let’s say 1-10%. Attrition rates are typically 5-6% so that’s another reference point.

          5. PhilipSugar

            Exactly. Maybe the VP of Sales over-hired and half need to go, or maybe she was too conservative and you need to add 20% more reps and pay for it out of another department. But I have noticed when you say X% it is a killer, because there are wide disparities within departments generally.

          6. William Mougayar

            Agreed on these nuances of course.

          7. William Mougayar

            but I don’t see why good performance has to go against backstabbing. you don’t think that employees can perform to their bests, without hurting each other? I do. it goes back to company culture and good management. In my books, backstabbing would be a greater offence than poor performance. I can coach poor performance (at least there is hope), but negative behavior goes against company culture and that’s sacro-saint territory.

          8. Stephen Voris

            I do think employees can perform to their best without hurting each other – indeed, if your employees aren’t actively helping each other something is probably off – I simply think that grading on a curve is a poor way to seek that (as we’ve hashed out elsewhere in this conversation).

          9. William Mougayar

            I disagree with that last point, based on my long experience with HP where the ranking practice was well done. When you run a large organization, you rank employees anyways in your head. That exercise was done behind closed doors, via a management group and consensus. The ranking doesn’t affect salaries, whereas performance ratings do. You could have 10 A-rated employees, but you would still be able to rank them. (rankings were not shared) Ranking is also used when you need to make tough decisions and let some people go. Typically those ranked on the lower scale would go first.

          10. Stephen Voris

            Doing the ranking privately gets around the backstabbing issue, at least. Relying on ranking at all I’d argue is specific to larger companies, as redundancy starts to show up: it’s easy to rank your best screwdrivers, wrenches, and hammers when you’ve got dozens of each, but trickier when you’ve only got one or two – when you wouldn’t be “doing with less” so much as “doing without”.

          11. PhilipSugar

            I do not believe in “transparency”. With that being said, I believe everybody eventually knows everything and doing it privately not only does not get around the backstabbing issue, it increases it.

          12. ShanaC

            it never is fully private

          13. PhilipSugar

            It is completely public. If you do it everyone will know. Now you might not know exactly where you rank but you know that it gets done.Rational behavior says if I know I am getting ranked against you (and it is against you which should tell you something right there) helping you out hurts me, and if you really extend that hurting you helps me.Now I might be a nice person and say I’m going to help you anyway, but I assure you there will eventually be a person that is going to play the game hard.So now it’s on because I have no choice.Yes we all know in our minds who we rank higher than others, yes if it comes down to we have to get rid of people to make the numbers we are going to figure out how we can best do that, yes we should look every month what and who is working and what and who is not.But you can see my adamancy against this idea because I have seen the results.Shit is it evil. It even pits managers against managers. Horse trading if you let me rank this person above that person I’ll rank that person below this person. If your manager doesn’t like playing the game you are screwed. If somehow it works out that you are a pawn you can get ranked low to protect someone else.This is not a game which I think some people think they are playing. This is people’s lives.

          14. PhilipSugar

            It gets out. Period. End of statement.

      3. Jess Bachman

        Yeah, sounds like stack ranking. Bad idea. See Microsofts lost decade.

        1. PhilipSugar

          I got it abolished at the company that bought mine. See my comment above.

        2. awaldstein

          I’m presuming I misunderstood William as he is a very experienced operator.Layoffs are essential also difficult so want to manage to avoid them not plan on them to clean up mistakes.

          1. PhilipSugar

            I worry that other people do. As you grow you can make mistakes and people can grow fiefdoms. Hey, maybe you cut 60% of your accounting staff like in the top rated comment, maybe you add to development or some other area. Things sometimes get out of whack. But when you say a percentage you are punishing those areas that were running lean.You are saying efficiency is a penalty.

          2. awaldstein

            It’s just hard.I always try to stay lean even in good times for just this reason.I have never been given a % number and done more than a few of these.Always a cut the top line spend figure across sales and marketing so at least I’ve had the revenue piece to think about as well.

      4. PhilipSugar

        Could not agree more. See my reply.

    2. PhilipSugar

      You have to make sure your organization doesn’t have poor performing people as that brings the performance of others down. People always look at the worst performer and think I’m not them I can slack a bit, it’s human nature.However, and this is a HUGE one.By placing an arbitrary percentage on it I strongly fear you are advocating for the rank and yank program which is the most evil and unproductive practice I have ever seen.When people realize you are going to say get rid of the bottom X% of employees, you have given all of your employees a strong incentive to actively sabotage other employees.They are not going to share knowledge or lend a hand. Why would they?? Making you better means I might now be on the hot seat. I’ll purposefully tell you mis-information and never lend a hand because that will hurt your ranking and allow me to be ranked hiring than you.

      1. William Mougayar

        Well, let’s not get caught-up in the ranking process. You don’t need an official ranking system to figure out what employees are not performing well. It will be obvious who isn’t performing.

        1. PhilipSugar

          Yes it is and it shouldn’t take an event to clean that problem up.Maybe I am feeling a bit raw right now because I’m seeing it. If you have anything that is an across the board goal, you penalize those areas that were outperforming.

          1. William Mougayar

            agreed. it depends on the culture of the company. I’ve seen when they let the fiscal year end to implement lay-offs, and i’ve seen immediate actions too.

          2. PhilipSugar

            The annual fiscal year lay-off just seems like such a poor idea to me.I suppose it gets you around the “firing” people aspect.But what is causes is poor people know they are going and give up.Good people are never sure and look find a job, and the grass is greener.And most perversely, you have people that find a job, and then lobby to get laid off to collect severance and a new salary.

  2. jason wright

    anything in particular about now?

    1. JimHirshfield

      The best time to buy a house was 20 years ago. The second best time is now. I think that’s how the expression goes. Of course, real estate isn’t what it used to be given the 2008 financial crisis. But the principle I think Fred is getting at is that there’s never a good time to be over-spending. So, the best time to cut costs was when you incurred those costs; the second best time to cut those costs is now. 😉

    2. Twain Twain

      Current OCD is on Internet of Things and battery life.Interested in Quantum Computing but not that amazed by Google, MS or Intel’s version of it which is to do with chip processors and horizontal+vertical binary data processing.Yes and QC could affect Blockchain like so:* https://www.quantamagazine….There’s another form which would get us to Conscious AI but the theoretical physicists and neuroscientists haven’t got a suitable equation for the “Unified Information Model” yet.At the moment, all they can offer are frameworks that give us logical, mechanistic, probabilitic and autistic AI.

      1. Stephen Voris

        At its simplest, battery life is inversely proportional to the number of things you want the device to do – plug a 9V into a rock, and it’ll last years; plug it into a home desktop and it won’t last a day. (note: I have not personally tested either of these cases 😛 )In between, though, language choice matters; as another Twain once said, the difference between the right word and the almost-right word is the difference between lightning and a lightning bug.

  3. Twain Twain

    As an investor, I was OCD about cashburn and that OCD’s proving useful now as an inventor-founder.When you’re a startup with resource constraints, the worst thing to do is waste them on rebuilding internally what can be leveraged and loaned from Open Source or elsewhere more cost-effectively.FOCUS ON INVESTING IN THE VALUE ASSETS (people, IP, code) WHICH ARE PROPRIETARY.

    1. William Mougayar

      What’s OCD?

      1. jason wright

        obsessive compulsive ‘disorder’, but behaviour that can be turned to healthy outcomes with personal acknowledgement and reflective discipline.

        1. Twain Twain

          Exactly this, thanks, :*). OCD in its negative form involves things like constantly putting things in the right place because the lines “don’t look right”, hand-washing until skin is raw & bleeds, not stepping on cracked slabs on sidewalk, triple-checking light switches etc.Jack Nicholson in ‘As Good as It Gets’ is a classic example of that form of OCD mixed with misanthropy.OCD in positive form enables someone to obsessively deep-dive into things that’ve caught their attention but seem amiss somewhere, to keep adjusting the moving pieces until they’re perfectly aligned, to consistently cross-verify (check) if their assumptions are spot on and to go, “Duh, dumb bum! Well, of course, it’s a pixel out / needs to be that exact shade of yellow / can’t be more cashburn than this ratio relative to income!” etc.

          1. JamesHRH

            Saw a tweet this weekend about Jobs & Musk having ‘a visceral reaction to imperfection.’No one is normal after all, its just that some people align themselves more effectively.

          2. Twain Twain

            Didn’t you assess me as Enneagram 5?”Fives are not interested in exploring what is already familiar and well-established; rather, their attention is drawn to the unusual, the overlooked, the secret, the occult, the bizarre, the fantastic, the “unthinkable.” Investigating “unknown territory”—knowing something that others do not know, or creating something that no one has ever experienced—allows Fives to have a niche for themselves that no one else occupies. They believe that developing this niche is the best way that they can attain independence and confidence.Thus, for their own security and self-esteem, Fives need to have at least one area in which they have a degree of expertise that will allow them to feel capable and connected with the world. Fives think, “I am going to find something that I can do really well, and then I will be able to meet the challenges of life. But I can’t have other things distracting me or getting in the way.”They therefore develop an intense focus on whatever they can master.”Classic OCD behavior.

          3. Chimpwithcans

            My wife to a tee. I on the other hand am a generalist. Opposites attract, but we can both frustrate one another!

          4. Twain Twain

            Love wins over all differences, :*).

        2. William Mougayar

          got it. like OOC? orderly obsessive compulsion

          1. JimHirshfield

            They say everything differently in Canada, eh?

          2. William Mougayar

            wait til you’re in London, then it’s really different.Elevator -> liftSidewalk -> pavementBar -> pubSubway -> tubeBathroom -> toiletFries -> chipsSecond floor -> first floor

          3. jason wright

            Hood – bonnet (car)Trunk – boot (car)Fender – mudguard (bicycle)Fawcet / Faucet (?) – tap

          4. matthewmclean

            Knocked up – to be wakened by knock at door

          5. William Mougayar

            what’s that other way you describe the “tap” on the contactless credit card when paying? I kept saying Tap, but they would say something else.

          6. jason wright

            this is London?

          7. William Mougayar

            Yes, in London. I think it’s called “Contactless”. We say Tap.

          8. jason wright

            yes, contactless is the name of the tech over here. low value transactions only. no PIN.

          9. LIAD

            i could care less -> i couldn’t care less

          10. Vasudev Ram

            Running for election -> standing for election.First floor -> ground floor.

          11. JamesHRH

            We say OCD out West. OOC must have its roots in another aspect of the William mosaic.

          12. jason wright

            OOC – that’s a new one for me. or is it the same thing with Canada’s Francophone influence showing itself (e.g. NATO becomes OTAN)?

          13. Twain Twain

            Order is a great thing as is obsessiveness about it because through order we see things more clearly and can start to understand things and their meanings+value.This is true in balance sheets as well as in system blueprints and in business strategy (e.g., your landscape diagram for Blockchain, :*)There’s a lot of information chaos across the Web, right? That’s partly why Google can’t make sense of it, specifically their SVP of Search Amit Singhal said, “Meaning is something that has eluded computer science.”Well, meaning has eluded CS because the code frameworks we’ve inherited from Ada Lovelace through Turing through Peter Norvig, W3C, Marvin Minsky, Ray Kurzweil et al haven’t been able to put that information chaos into UNIVERSAL COHERENT ORDER.It’s not enough to just have tools to put them into an ordered quantitative table — like John Graunt did wrt mortality rates in 1662 (and that’s how statistics and social demographics as disciplines were borne) and what the MongoDB, Cassandra, Spark, Hadoop et al do today.It’s also not enough to have huge Quantum servers that can process the correlations of all those data points in all those pooled databases faster.It’s also not enough to have 5-stars, emojis and #topic hashtag frequency counts to add shallow qualitative context to that data.Historically, maths has been used as the tool to try to make order of information. Hence Euclidean vectors, Aristotlian+Descartian logic, PageRank, Merkle Trees, friend-of-friend Social Graphs etc.Whilst computing systems may be “Turing-complete”, this doesn’t mean they’re coherent.Another form of OOD would need to be designed and engineered into the machines for this.So… it’s super witty that someone with OOD systematically sets about enabling machine intelligence to put things into order more like human minds do (relatively rather than by ranked order) and to make sense of things differently from what was possible before.Haha, OOD is a big plus!

          14. William Mougayar

            Order vs. disorder. Both lead to good things.That would be a great essay topic.

          15. Twain Twain

            Chaos & order by a scientist, a philosopher and an artist… And the world’s greatest genius.

          16. Stephen Voris

            Inner grammarian’s twitching a little over “OOD” – is it a typo of OCD, short for Object Oriented Design, or some other acronym I can’t think of at the moment?Anyway, though… order from one perspective is often chaos from another, even when restricting our domain to humans, never mind machines. And juxtaposed against the perils of groupthink combined with human (or machine) fallibility, universal coherent order might well be a case of trying to make the Earth flat: sooner or later, reality (100% accurate, but ε% comprehensible) reasserts itself. Fortunately, order doesn’t have to be universal to be beneficial.

          17. Twain Twain

            Actually, the current model of computing is “Earth is flat / a logic box.”

          18. Stephen Voris

            Couple ways to read that; in the sense of “computers always get true answers from true inputs and correct programming”, this is arguably one of the best strengths of computers as they exist today, because it forces people to re-examine their assumptions when the computer returns garbage.In the sense of “computing is using a model whose flaws/inadequacies will come back to bite it (or already are) – and I’ve got a better one”, well – the flaws are evident (some of them, at least – e.g.: the Halting Problem), but to the meager extent that I’m anything more than a layman in the field, the alternatives are not so obvious. Color me curious… think you’d be willing to go into more detail? Privately if you’d prefer – I’m reachable via gmail, at telverayn plus the usual suffix.

  4. Michael Elling

    Constant attention to a good strategy can have a greater impact than operationally focused belt-tightening. And I’m not saying the latter shouldn’t be endemic to strategy in a good way. As CSO at Multex I created an operational matrix as part of the corporate strategy that clearly showed how 2 very powerful individuals were wasting resources because they were overstepping bounds. Not only were they not allowing corporate build/buy/lease decision processes from occurring, they were building redundant teams and consuming resources without regard for ways to work together or leverage existing, internal assets more effectively.

  5. LIAD

    working within constraints, whether enforced voluntarily or through necessity, seems always to be beneficial. it forces prioritisation and self-restraint and engenders momentum and creative thinking.JLM’s ‘no revolution ever happened on a full stomach’ comes to mind.

    1. JimHirshfield

      Upvote for JLM quote.

      1. James Ferguson @kWIQly

        Upvote for showing appreciation 🙂

        1. JimHirshfield

          Upvote for appreciating my appreciation.

          1. James Ferguson @kWIQly

            … iterate

  6. Tom Labus

    It is kind of instinctive when to do some cutting. It’s a great sign to see if management is awake.

  7. David Carde

    A consistent review of how a company/division spends money is critical to success, yet it’s unfortunate that many times it takes external forces/markets (fear) to catalyze a thorough review. When it’s all about growth or it’s boom times, many entities end up being wasteful. Think of how much better positioned companies would be if they made it a consistent practice to be mindful of spending throughout the lifeline — regardless of external factors.

    1. Matt Zagaja

      I think there is an element of letting people go that seems like a “death sentence”. Letting someone go in good times probably is much less so.

  8. pointsnfigures

    Fund raising has gotten more challenging in the last year. Extending runway by tightening is one solution to that problem. The other is to focus on growing top line revenue. Nothing builds bottom line revenue like increasing top line revenue (assuming positive unit economics) I think that at the bottom rung of the funding food chain, it would be very helpful for startups if Series A investors were not only transparent about what they invest in, but general milestones they want to see a seed startup hit.I wish the government bureaucracy would read this post and take action on it…..

    1. JimHirshfield

      Not sure what you meant by the gov’t…but I’m with you 100%. No better medicine that sales, sales, and more sales.

      1. pointsnfigures

        When has a bureaucratic govt agency ever cut it’s budget? They ought to pay attention to Fred’s post. Cut their budgets.

        1. JimHirshfield

          OK, true that. I was trying to apply it to startups and gov’t startup policy.

        2. JamesHRH

          Floored me when I first heard that Income Tax was a temporary measure.

    2. Tom Labus

      Let’s start with Defense

  9. JimHirshfield

    Yeah, time to cut back on the ho’s…http://smallbiztrends.com/w…Oh, you thought I meant something else?

    1. Tom Labus


    2. Mario Cantin

      LOL! … Or should I say “ho, ho, ho”?

  10. Pranay Srinivasan

    generally how much can these cost cutting measures save as a proportion of the current burn? More than 25%?

  11. John Pepper

    We had 4.5 people focused on accounting when I took over the company in June. Today we have 1 plus an outsourced solution (equivalent to 0.75), and it is the most junior person of the original 4.5 who remains. (I quietly asked myself and a few other close allies if the 4.5 people had been required to count all of the unnecessary losses of the prior couple of years – they all chose to leave, incidentally.)Now that we have cut to the bone and can actually feel when the bone gets nicked (it hurts as expected), we know quickly where we need to either a) add resources to the accounting arm of the business to complete critical tasks, b) stop doing certain activities because they add little to no value or c) search for new technology that helps our 1 internal person complete these tasks more efficiently.The other benefit of this particular belt tightening is that the junior person was given a chance to step up and take new levels of responsibility – which she has done and some. In a matter of weeks she went from simply waiting for directions from others (who also waited for directions from others) to being an aggressive detective of wasteful activity and proactive efficiency executor. She also got a 25% raise and yet the company wins too. Yes, belt tightening can feel very good – liberating even.In 2014 the company ran $3.5M in annual overhead expenses… now we are running at a $1.75M annual pace. The margin of safety on company profitability has shifted dramatically. We can’t suck horribly as a family of 17 restaurants to be profitable in 2016, but we could get away with “kinda” sucking and still be in the black. Of course, the plan is not to suck…

    1. Elia Freedman

      My mom was the only accountant for an architectural firm for many years. I always argued that she should have negotiated her salary in part to include a bonus for money saved the company. She literally found millions of dollars over the years that she either saved her company or that brought in missed revenue. She never did it.

      1. John Pepper

        Your mom sounds like she was the kind of person we all need to be more like these days.

        1. Elia Freedman

          Thanks. She was very good at her job.

          1. Twain Twain

            Your mother is lucky you’re her son. She’s an example of how women do amazing things for their companies and they don’t always get the payment+credit they EARNED.She earned those rewards because of her expertise.

    2. PhilipSugar

      It’s a brutal race to go from 2 restaurants to 20, the same kind of race it is to go from 20 employees to 100. What I like about your comment is that you weren’t just focused on lets get rid of X people across the board but to understand had people built fiefdoms? And how do we change the game?You didn’t say something like lets cut food costs by 10% or get rid of 10% of the kitchen staff which could kill quality and repeat business.

      1. John Pepper

        We are actually reallocating money saved at corporate level to investments at the operational level… to benefit the people interfacing every day with our customers. The front line will benefit directly.

        1. PhilipSugar

          +100Huge. I am corporate overhead. That’s ok, but what’s not is when people concentrate on cutting expenses and the last to go is overhead

          1. LE

            With how much you travel how can you be “corporate overhead” in a pejorative sense? I would think that if they are not only paying you but also all of your travel expenses there has to be great value in that. I guess I am assuming that in your travel what you are doing is interfacing with customers maybe I am wrong about that or misreading what you are saying.

          2. PhilipSugar

            I am not COGS cost of goods sold. I don’t actually solve a customers problem. Not that I don’t provide tremendous value or travel a ton 20k+ before the end of the year.You and JLM say it the best, inexperienced (and experienced) people look at this advice and think cut. What I have seen happen is the doers get their backs broken, and the overhead keeps their job.This comes toppling down as the good doers leave, the bad doers stay and eventually the heavy overhead brings everything down.

    3. creative group

      seabird37:have you considered applications or outsourcing that can add value to your organization without adding another salary? With the Restaurant businessyou should be able to realize what positions in the office is essential and nonessential quickly. You will find a need to fine tune the overhead quarterly.How about invest in that junior turned senior accounting person and pay forcollege courses. Invest in your business that will payoff in the near term.Just a suggestion.

      1. John Pepper

        Agree 100% on investing in our people as the most important investments we can make. The money saved by becoming lean can be redeployed in just this manner.

      2. Vasudev Ram

        >How about invest in that junior turned senior accounting person and pay for college courses.Good one.This reminds me of a joke that was circulating as a LinkedIn update some time ago. (The kind that goes somewhat viral.) It got a ton of Likes:CFO to CEO: What happens if we invest in (training) our people, and they leave?CEO to CFO: What happens if we don’t, and they stay?

  12. JLM

    .When I read something like this I wonder what people think it takes to run a successful business. This is so fundamental as to question what management and the board are doing on a regular basis.In Fred’s example, he cites 2-3 years of distracting growth — wow, that is an enormous period of time. I could have understood a 6 month time period but 2-3 years?CEOs and Boards should have an 11×17 piece of paper with sixteen (8 per side) graphs which track the company’s most important KPIs (hate that word, sorry) and they should be looking at that on a monthly basis. Not meeting, just looking.Some of these KPIs should be exactly on point as it relates to things like “operating expenses as % of revenue” or FTE/PTE body count, or CTA v LTV or revenue per salesperson.The CFO should be the “conscience of the company” and spend one day a month looking at the expense side of the equation in great detail. The next day the CEO and the CFO should be lunching to discuss this stuff.One thing Fred hits on is very important — purchasing. Startups don’t have any idea of the power of competitive bidding or simply checking the cost of things and seeing if there is an opportunity to delete, shrink, replace, reprice any periodic cost.A good discipline is to make a list of the top 25 vendor contracts in your company and work from the largest to the smallest twice per year. The easiest course of action is to do without something. I remember a startup which had nightly janitorial service and a coffee service. The CEO eliminated both to no discernible impact. He bought a Keurig and folks brought their own coffee K cups.These are very simple business running disciplines and, again, I am appalled that they are not routinely done particularly given the quality of the Board oversight.Blocking, tackling. You can be lean if it is part of your normal business running discipline.JLMwww.themusingsofthebigredca…

    1. Twain Twain

      And this is why, even if I don’t comment, I show up to AVC bar to learn your practical wisdoms!

      1. Donna Brewington White

        Imagine having him as a coach.

        1. Twain Twain

          I know, lucky you!

    2. JimHirshfield

      “…nightly janitorial service and a coffee service. The CEO eliminated both to no discernible impact.”So who cleaned the toilets?

      1. Jess Bachman

        The employees had to flush the toilets themselves, instead of the janitor doing it each night. Yeah.. it wasn’t a good scene.

        1. JimHirshfield

          A crappy situation

          1. Jess Bachman

            Everyone was bummed out.

      2. LE

        Here are the types of things you do when spending your own money. When it is your bottom line.I have a particular rental property where I provide the janitorial service. It’s a Physicians office with multiple offices as opposed to one tenant. (The single tenant offices hire their own services). Anyway the “cleaning lady” who I hired (not a service – it’s like a lady that would clean your own house), well, I tell her to stop by several times per month to clean the bathroom. So I received a few calls from the tenants saying that she is not coming enough and the trash cans are overflowing. Toilet and sinks are fine. So instead of having her come more days at additional expense, I ordered extra trash cans and liners (from Amazon) and told the tenants “when the cans overflow just swap them out and put the filled cans in the utility room and the cleaning lady will get it all fixed up”. And so far no complaints and they are cool with this. Why? Because when I did the lease I lowered the rent but added back a charge for both utilities and cleaning expense. So that way they had skin in the game. Now they are not running the HVAC and wasting energy they are paying attention to it. And they are cool with doing something simple like swapping a trash can. See how easy that was? See how anything can be negotiated as long as you have a bit of leverage? See how people are agreeable when they have some motivation (not spending more of their money)?

        1. JimHirshfield

          I see

    3. Richard

      Is there really one general rule? What if youare a start up and your best programmer has told you that she’ll work with the company for 24 months and at that time if the company hasn’t gotten traction, she is gone. And this same employee likes a clean bathroom and really good coffee in the morning ? There is a cost associated with every cut not knowing what those costs are and cutting in the dark can be just as risky.

      1. JLM

        .Are you building a team? On a team everybody pitches in.I did a turnaround once. The company offices were filthy including a uni-sex communal bathroom.The second day I came to work in my best blue suit, French cuffs and a box of cleaning materials.With my suit jacket on, I spent an hour GI-ing that bathroom. Spotless.That afternoon, I had the first meeting with the “disgruntled” management.I told them we were going to “work” out of our problems.It was a huge success and the receptionist had a picture of me cleaning that shitty bathroom.I still have the suit.Leadership is easy if you’re willing to get dirty. So damn easy.JLM http://www.themusingsofthebigredca...

        1. Jess Bachman

          still have the picture?

        2. LE

          No pocket square? Remember you are under oath here.

          1. JLM

            .Homemade 4-pointer. Fold it, staple it to an index card, voila!A gentleman is not dressed without a pocket square.JLMwww.themusingsofthebigredca…

          2. LE

            I think this is the next thing that perfect daughter needs to sell on the net. Custom pocket squares. I am not kidding I am serious. She would get PR just for the backstory as to why she is offering the product. “Well growing up my Dad always told me…” Trust me on this I am good with this type of thing..She can easily do the monograms with any Brother machine. With a thread to tie it to a nice card stock (with a few replacements) instead of a staple. I can see her on shark tank pitching it to Damon John….

          3. ShanaC

            why do you staple it?

        3. LE

          What your comment proves is how business is such an analog subject and that behavior and success varies so much with not only the strategy but who is doing the execution of the strategy. Why people are kidding themselves thinking they can truly learn by reading Fortune, Forbes or some blog. Very likely what you did wouldn’t work if tried with a different group of people or a different situation or by a different person. However with you and that place it worked. [1][1] I wonder what Henry Kravis would have thought seeing you in that bathroom cleaning it.

    4. LE

      Great Comment. [1]Startups don’t have any idea of the power of competitive bidding or simply checking the cost of things and seeing if there is an opportunity to delete, shrink, replace, reprice any periodic cost.Of course you don’t mean “startups” what you might mean is “startups run by people who have never run a business before”.With what you say though doesn’t it depend on the company and the makeup of the board? Hard for me to imagine that VC’s on these boards (or angel investors) are doing anything but managing for the big kill and runway length by focusing on the major expenses or opportunities. My impression, and I could be wrong, is that they don’t sweat the details because the details are not what gets them to the promised land. In other words “Hire Marissa Meyer” not “can we outsource restroom cleaning”. I am not talking about what they should do just what I am guessing that they do.Startups don’t have any idea of the power of competitive biddingA founder that I dealt with recently thought that an attorney had quoted $500 total for a particular piece of work rather than $500 per hour. Alternate universe. Worked at Google before striking out on their own. And yes I am making fun of them. I know the attorney clearly said “per hour”.He bought a Keurig and folks brought their own coffee K cups.What about the value of the office space needed for the pingpong tables? Why stop at free Keurig cups, eh? In all seriousness though isn’t there the risk (with these startups) of sending a message which says “polish thy resume”?These are very simple business running disciplines and, again, I am appalled that they are not routinely done particularly given the quality of the Board oversight.Perhaps because of the reason that I mentioned (perception that it won’t move the needle) and also the fact that the board members don’t have the time and focus as well as no operational experience to even know about these things.A company (in Silicon Valley that made heavy tech gear) that I am familiar with way back used to ship almost everything by Fedex at tremendous expense. Even heavy shipments. Why? The product managers didn’t know there was this thing called “LTL Trucks” or even trucking companies that were setup to handle those types of things cost effectively. [2] Neither did the managers above them. Now if the board members had actually either known themselves what was going on or if they even hired some consultants [3] they might have uncovered this type of thing. But they wouldn’t hire consultants because it won’t move the needle. Just let the thing leak a bit and manage the top line (do I have it right?)[1] And of course a cartoon that Jim posts has more upvotes (as of right now) such is AVC. The only thing that can outdo a good cartoon on AVC is Seth Godin and his fan club showing up early on and taking the top spot.[2] At a typical small business where the owner is spending their own money this type of thing would not happen. It couldn’t happen there isn’t enough money to even make a mistake like this. Other than the ones run by people who think it’s good practice to put things on an AMEX card (those silly commercials..)[3] After I sold my first company I did a short gig doing some consulting to cut costs in companies that were clients of my accountant. I would dig through file cabinets of invoices to try and uncover cost savings (and stupidity).

    5. Tom Labus

      This requires work and not glamourous work. Emily won’t be calling to interview you for doing this stuff. Anything else is guessing

    6. PhilipSugar

      I am so with you on the frequency. When you do it only rarely people realize they need to hide, build, and protect. When it happens every month, and every day, people realize they need to perform.

    7. ShanaC

      the expectation is high growth, so people want to meet the target of growth over all, figuring they can flip otherwise, since that is where the market was.

  13. OurielOhayon

    can you be more specific on where exactly those costs were cut? was it employee perks? free food? ..

  14. kenberger

    “RIP Good Times”?

  15. sigmaalgebra

    Hiring is darned expensive from the very start when first think of hiring someone through the recruiting, selecting, getting the person into the company, meeting people, trained in the ways of the company, getting office space, computing, a business credit card, maybe going to some meetings that have some expenses, starting on some work, learning the background of the work, figuring out how the heck to get the work done (it shouldn’t be trivial), …, and, then, presto, bingo, slam, bam, fire the person maybe before they even got the code tested or documented. So, costs — high. Could blow $200+ K doing that just once. Benefit — zip, zilch, and zero. Bottom line — big, bad, bummer. Dumb-de-dumb dumb. Half-done work. Half-vast planning. Big waste.Hurry up, stop, backup. Gads.I love to see good work; half-vast planning makes me cry.Sure, if got a pre-seed round of $300 million, no problemo. When was the last time a startup got such a pre-seed round?How the heck could a company be dumb enough to hire people and then soon fire them? Right! I just figured out how: A company going out of business!

  16. Joah Spearman

    This is such a timely and relevant post for me, especially as my co-founder, founding engineer and I just agreed to close our office in order to further reduce our monthly spend and to move funds over to bringing on a contract developer to assist up with the massive update of our product for mobile web users.

  17. RichardF

    VC backed start up’s ime are absolutely prone to over hiring (at VP level and everything that comes with that, expenses, personal assistant), installing the xbox “creative” space and the obligatory pool and ping pong tables (hey we’re a fun creative place to be) once they get beyond the seed (It used to be A series). Then the realisation kicks in that the revenue figures in the spreadsheet for year 2 are perhaps not quite as realistic as they thought (funny that) and that their cashflow graph is the classic ski slope curve…………

  18. Ana Milicevic

    Fitting time of year for this type of action seeing how most companies on a calendar fiscal year are square in the throes of budgeting season (fun!).I don’t look at it as tightening though – needs change over time and what was an essential investment 14 months ago may not be so essential or even necessary any more. This is especially true of high-growth businesses where entire product lines may prove to be unnecessary and best discontinued quickly and as painlessly as possible. So in other words, and very much in the spirit of your post Fred, this is a welcome and necessary step that may be short-term unpleasant on occasion, but if handled well is overwhelmingly a positive.Happy Cyber Monday everyone – just think: 10 short years ago someone had to come up with a fake holiday to make sure folks in offices with broadband used that broadband to buy stuff on the Monday after Thanksgiving. Tell your kids and see how they parse the whole ‘broadband only at work’ concept for a bit of weekday fun 😉

  19. Stacey Wernick

    Given the ease with which p&l, cash flow and balancesheet projections can be run, it makes sense to continually manage expenses withina context of and continuous focus on, sound vision, planning & execution.

  20. Douglas Crets

    I’m going to throw in here that ride sharing companies like Lyft and Uber have “hired” drivers and staff too aggressively and will have to make cuts. Thoughts?

    1. John Pepper

      They don’t really pay the drivers unless the drivers produce revenue… so I’m not sure that’s where they would need to cut. I do think the marketing spend on incentives to recruit drivers and riders will need to be significantly reduced at some point… as a frequent rider and former driver, I felt like it wouldn’t be that hard to ensure Uber never saw a dime of revenue from either constituent.

      1. Douglas Crets

        After thinking, I don’t think it’s the drivers. But marketing, sure.

      2. PhilipSugar

        Meaning the here is my card call me direct next time??? Somebody (Square) is going to automate this, margins go from 20% to 3%Each internet wave you get this. We are going to take a big cut of each transaction. The internet is going to disintermediate the incumbents!!!Payback is a bitch when it happens to you. Now don’t misunderstand. I think there are lot of “internet” companies that are now really just transforming existing industries which is great.

    2. ShanaC

      some just won’t get riders?

  21. christopolis

    firing people is a major sign of very bad management and capital allocation. it is indicative of too much money chasing not enough value. very unfortunate. variation kills business and growth.

  22. ShanaC

    That said – don’t be pennywise and pound foolish.For example: Turns out keeping the good coffee and the snacks around are profitable (people don’t leave for breaks, less likely to get sugar lows, less kvechy, more loyal_, whereas limiting travel budgets are almost always a good place to cut.

  23. Saju Thomas

    While I agree that little drops fill the bucket, the biggest money drains are marketing – conferences, consultants, booths and expensive superstar execs not pulling their weight and side projects which are not core to the product success. Make the hard choices, vendor contracts are easy!!

  24. Twain Twain

    And this is why, even if I don’t comment, I show up to AVC bar to learn your practical wisdoms too!

  25. LE

    One thing that is often overlooked when people talk about cost savings is that when people spend money it is because they have perceived a benefit from spending the money in the first place. Doesn’t mean their assumptions are right, but cost cutting sounds like it makes sense when a company needs to do so but less so before they appear to need to do so when it looks like “Keurig cups are a good inexpensive perk” or the annual Christmas party.Business is analog it’s not digital. You have to make smart decisions but you only know for sure after the fact. And it’s all one great big “it depends on the exact circumstances and situation”.I remember a salesman early on who I deal with at the company that I started out of college telling me to not buy the bigger machine (that he sold ironically) because “you know when things get tough that extra $250 per month (or whatever it was) could mean the difference between staying alive for another week”. I didn’t listen to him because at the time I thought we were better served by the bigger machine. And as it happened I was right and he was wrong. After the fact of course either of us could have been right. Ditto for dozens of other things that I did that my father hassled me about. “Why are you buying that equipment or spending that money do you have the orders for it?”. No but if I don’t buy the machine I definitely won’t have the orders. [1][1] Importantly he had no experience in a business that had machinery so to him this was a foreign concept. He understood import export and machines were not the way he knew how to make a living. And don’t get me started on how accountants look at things. What I call “leasing is always better than buying a car..”.

  26. Lisa Lorimer

    Music to my ears, Charlie Crystle! –LL

  27. JLM

    .Strong story.Stronger than an acre of garlic.Well played.JLMwww.themusingsofthebigredca…

  28. LE

    Maybe you are already doing this but you need to locate and keep on top of all of the auctions for equipment (and auctioneers). That way you can snap up bargains prior to actual need at deep discounts. People who sell used machinery do this as a way of arbitrage. They know some guy (like you) will need the machine within X years and they warehouse it and profit in anticipation or your order.

  29. PhilipSugar

    Look at the Laffer curve, sometimes scarcity creates demand

  30. LE

    For example this one which has several auctions right now for bakery items. This is a needle in a haystack type of thing of course.http://www.bidspotter.com/e

  31. Twain Twain

    Better limited and deep than wide and shallow!