When a New Year starts the sporting goods stores stock up on running shoes and athletic clothing. They do this because they know that many people have just made a resolution to get healthy and one of the first things they will do is to go buy new clothes and shoes. Nevermind that they probably have a pair of still-good shoes that are a few months old. These purpose driven resolutionists are willing to spend top dollar for the newest gear that will have a direct impact on their success! Unfortunately the resolution will fade before February is on the calendar and the money spent on gear will still be gone.
Just like resolutionist athletes people starting businesses, and even some that have several years under their belt, fall into focusing more on the gear than the work. After starting a business we start thinking of the ‘gear’ that will make it successful. Gear translates to SaaS apps and other services.
The best way to ensure the success of your microbusiness is to adopt an attitude of extreme frugality.
Having expenses doesn’t mean you are in business. Don’t pay undue attention to your accountant if they say you need to have more expenses to avoid taxes. If you don’t focus on your product and customers there won’t be any income to pay expenses.
When I switched from freelance client work to products there was a dip in revenue because I made the switch too quickly. Since keeping the lights on in my own home was more important than keeping a Basecamp account I went through my business expenses and slashed everything. I had fallen into the trap of keeping things that cost me monthly that I really didn’t need.
At one point my P&L expenses section looked like this:
- Project management and CRM (Basecamp and Highrise) $100
- Time Tracking and Invoicing (Harvest) $49
- Book keeping app (QuickBooks Online or Xero) $49
- Hosting (Dedicated server) $250
- Office space $200
- Office internet connection $60
- Office insurance $50
- Phone (Vonage) $25
- Coworking space $50
- Merchant Account (Authorize.net ) $50
That totaled $893 / month or $10,716 / year in recurring expenses.
The gross revenue of the business was between $65K and $85K per year so $10K was a huge percentage of that. I’d much rather keep that money to pay myself or put into retained earnings.
Guidelines for Microbusiness Expenses
Once I made the decision to slash and burn I used the following four criteria to decide if I needed to keep a service:
1. Do I really need this?
The first question to ask is if the service is needed at all. Is it a want or is it a need. Is it vital to your business or a vanity expense.
I keep very low minutes on my mobile phone because I don’t make voice calls, but when I was sub contracting for an agency they wanted me to be on daily scrum calls. When I got an inflated mobile bill I opened a Vonage account to be my ‘business phone’. Later I realized that I didn’t need a phone to be in business so the Vonage account was the first item to go.
Another app that I no longer needed was Basecamp. Since I no longer do client work there’s no need to keep an project app. I also got rid of my office and moved back to working from coffee shops and my house.
2. Is there a free level available?
Most SaaS applications will offer a free account for a reduced number of users or features. I’ve been a Harvest user for 5 years and I like their service. I have years of time tracking data and invoices in their app. I was using their $49 / month plan, but no longer needed multiple users, time tracking for multiple projects nor branding for the invoices. So I switched to the free plan which I can still use to invoice and receive payments and track my projects.
Along with free, see if you can get by with a less-cost alternative. For example I didn’t need to be paying $250/month for a dedicated server. I moved to a $50 / month VPS and haven’t looked back.
3. Is there a one time charge or self-hosted option?
Despite the move to the monthly subscription model or software there are still ways to pay once. For my accounting software I was using QuickBooks Online ($49/month) and then later Xero ($39/month). I never liked QuickBooks, and loved Xero. I do need a way to keep my business books, but when I looked at the volume and complexity of my books it didn’t make sense to pay monthly for a service. I switched to using Google Docs spreadsheets. “But what about your valuable time???” you may ask. It takes me about an hour to do my monthly P&L. I don’t mind doing this and I like the cost savings.
4. Go per-transaction instead of per-month
Credit card processing was a sore spot for me. I loathed getting my merchant account statement with the cryptic fees and always different monthly recurring charges. Then Stripe came along. With my old Authorize.net account I was charged about $50 / month not related to transactions and $70 per year. With Stripe I only get charged if I have sales. Simply brilliant.
5. Pay monthly as a last resort
If there is an application or service that is vital to your business and is not offered as a one-time cost or per transaction cost then pay per month. Be sure to keep scrutinizing the cost and strive to keep overall expenses low. The only thing I currently pay monthly for is hosting.
One time expenses
There are still some one-time fees like domain names, SSL certificates, and travel. Those can be kept low or delayed until a future month.
It’s possible to run a profitable micro business with just a hosting account!
Slashing my expenses didn’t have any affect on my gross revenues. I still have the same revenue, but only spend $70 per month on recurring expenses. So in effect I gave myself a raise by reducing how much I was spending! So skip signing up for the fancy new SaaS, and focus on the things that serve your customers and build your revenue.
Have you tamed your business expenses? What things do you find vital to your business?