There are many theories about how business owners should spend money, but I think there's one rule that will guide you well: Always spend your money like it's your own.
Entrepreneurs are typically so focused on preserving enough cash to stay alive that I don't usually find them blowing money. It's rare to see fat expense accounts or even market rate salaries. But while spending too much isn't the problem, spending on the wrong things at the wrong time often is. These are eight ways founders miscalculate:
1. Spending too much too early.
If you don't have a product yet, don't spend much on anything other than developing the product.
2. Not spending enough.
When the flywheel is really going, it might be necessary to spend money on increasing sales and marketing to grow even faster. In other instances, it becomes essential to spend more building the architecture and systems to stay ahead of the growth.
I learned this at eBay when we had to figure out funding for our international business, which was losing money versus North America, where we were already profitable and knew we could do better. This was a big decision, but we ultimately made the long-term bet on international because we knew we had to be a global company and not just a domestic one.
This was a hard decision but turned out to the right one and by the time I left eBay, international made up more than 50 percent of our revenue and we were a much bigger company because we were global.
3. Hiring a sales team too early.
If you're building an enterprise product, having a big sales organization before you have a product is a mistake. Salesforce is a great example of a company that did not invest in sales until it was necessary. Instead, it invested its resources in developing a useful product. And the founders and early employees pitched the service wherever they went--including while waiting in line at the supermarket.
4. Beefing up on administrative matters in the beginning.
Building finance or human resources teams too early is not prudent. Initially, those can--and probably should--be outsourced.
5. Falling for office space.
While most entrepreneurs are inherently frugal, many have a blind spot for nice office facilities. The justifications for a hip, well-located space can be tempting--this space will attract employees, and it will impress clients and press. But often the cost simply isn't worth it, and worse, getting a space that says, "We made it!" when really, you haven't, can draw the wrong talent and infuse your culture with a sense of false accomplishment.
6. Paying full salaries.
Offering high salaries at an early stage is a surefire way to burn cash. At a startup, everyone should be taking risk, and compensation should be a combination of salary and equity. If the business is successful, the equity will be far more valuable than cash.
7. Underutilizing all available resources.
If you need help, ask for it from your advisers and board. Don't think of your board members as just folks who tell you what to do; put them to work. The best entrepreneurs know how to leverage their network and are not shy about asking for advice and introductions.
8. Wasting time.
Capital is not only money; time is just as valuable, and managing it well is just as crucial. You have to do as much as you can every day, week, month, and year. Utilizing time effectively is one of the most important skills in an entrepreneur's arsenal.
Those are all the cardinal rules of what not to do, but what about when you've already had a misstep? You have to figure out how to change the burn rate to extend your life. You should always know how much cash you are burning each month and how much time you have left to live.
This is the cold reality of managing your company. Just like in the rest of your financial life, if you are not able to pay your bills you'll have to find a way to spend less or earn more.
Effectively managing money for a company is a never-ending process. Even public companies have trouble doing this well, as evidenced by layoffs. There are times when you need to be frugal and times when you need to fuel growth and capture the market opportunity. Developing the judgment to know which actions to take at which time is where the magic happens.