“I think each of the founders should have a company credit card,” “Randy,” one of my co-founders said during an early staff meeting. “it will ease some of the burden on you.”
I could tell from the tone in Randy's voice that easing my burden wasn't Randy's goal. In fact, I was beginning to wonder if Randy's heart was in the right place.
So I said to Randy, “That’s okay. I want the burden.”
And you want the burden too. Credit cards give people the ability to spend without approval.
Eventually you can loosen the grip on spending, but not now. You want to sign every check because that’s how you keep control of the spending.
Cash is the only thing you have complete control over as a startup CEO.
Fortuitously, I was going to have dinner with my old boss, Bill, that evening. The first question Bill asked me was, “Are you personally signing every check?” Bill, as you can see, was seriously old school in his approach.
“Yes, I am,” I replied.
“That’s good,” he said. “That’s an important tool for you to keep control of the spending.”
Bill was right. Signing every check was important. Because controlling the money is critical.
It’s amazing how quickly things can get out of control if you are not careful. Here are a couple other tips to keep your spending under control:
A. No minimum spending approval.
Randy’s next play was a minimum spending allowance. “We should be able to approve spending up to $1,000,” Randy said at the next staff meeting.
It seems like a reasonable request, doesn’t it? $1,000 isn’t a lot of money, and these are your senior management team.
Shouldn’t your co-founders be allowed to spend $1,000 as they see fit?
Again, I said, “No.” I wanted to sign every check.
B. Only spend where it’s truly necessary to spend money.
So, it wasn’t a big surprise when Randy pushed for a $300,000 Enterprise Resource Planning (ERP) manufacturing system that we didn’t need. We could run manufacturing with an Excel spreadsheet and Quickbooks.
Randy had recruited “Ken,” another co-founder, to sell me on the idea. We met in the large conference room next to my office.
Their pitch was a typical “rabbit out of the hat” pitch. Ken and Randy went through the various options we had. They rejected using Oracle’s multimillion dollar system as too expensive, and they rejected using a combination of Quickbooks and Excel as too “buggy.”
To their thinking, this left us with only one option: The $300,000 inventory management system. There was just one slight problem:
We hadn’t shipped anything yet! We were eight months away from launching our first product!
We didn’t need to spend the money. For the moment, Quickbooks and Excel would do just fine.
We saved $300,000 just by using common sense. In fact, we wouldn’t need a more complex system for years.
It seems like a small thing, but keeping control of the cash and your bank account, sets the tone for how the company will function.
About one month later, we were interviewing a potential customer service manager, and Ken took her to lunch.
The next day I received Ken's expense report. There was a charge for lunch as I expected. Then, there was an additional charge I didn’t expect:
Mileage: 1 Mile $0.50
I was incensed. Now, you can argue that Ken had every right to charge the one mile round trip to and from the restaurant to the company. But, that’s not the spirit of being frugal.
You could further argue that maybe Ken needed the money. He didn’t. He was a millionaire many times over.
And you could also argue that the $0.50 wasn’t going to change the company’s fortunes. I wasn’t concerned about the $0.50, but I was concerned about the thought process.
I decided to bring up the issue at our next staff meeting. I spoke about the necessity of determining what kind of company we were going to be.
“Are we going to be a company that spends freely, or are we going to be a company that manages its money well?” I asked the group.
Then, I brought up the issue of expense reports and mileage expenses. Without saying it was Ken, I talked about the mileage issue.
“We’re a startup,” Randy exclaimed! “We can’t do things like (charging one mile trips) that!”
“But I thought we said we were going to charge everything we could to the company!” Ken said looking directly at Randy.
I was stunned.
Before I could say anything, another co-founder, Adolfo said, “I’m going to watch my wallet with you two.”
I knew what needed to be done.
Soon thereafter, Ken and Randy were no longer with the company.
You have a choice as a small company: Are you going to spend frivolously on things you don't need, or are you going to be appropriately frugal?
Being appropriately frugal means saving money on things you can save money on.
A. Buy all your office furniture used or get it for free.
We got our first set of twenty cubicles for $500. The next set we got for free. They didn’t match, but who cares.
B. Buy all your test equipment used.
We bought everything in our lab second-hand. The equipment was perfectly fine, and we saved a bundle of money.
C. Fly coach.
This is an obvious one, but I’m still surprised at how many people don’t do it.
There are many more you can do, but setting the tone of frugality is contagious. The rest of the team automatically starts thinking of ways to save money when you lead by example.
On the flip side, spend money where you need to spend the money. Your situation is likely different, but we spent on:
A. Hiring the best engineers we could.
High quality engineers are a scarce commodity in our industry (high performance analog ICs). We spent what we needed to spend in order to hire great engineers.
B. Having the appropriate software and tools for the engineers.
Releasing a hardware product costs a reasonable amount of money and time, so the more first-time successes the better. We never scrimped on the verification tools our engineers needed.
We wanted our benefits to match up with our larger competitors. So we gave our employees great healthcare options.
And then we ate the cost increases as premiums rose each year to keep our employees costs low. This was a big selling point when recruiting new employees.
Our business model was predicated on having thousands of customers buying from us, so we spent on acquiring customers. At the same time, we negotiated great deals with the various trade publications in our industry.
But the appropriately frugal mindset never changes once it’s established.
One of my favorite meetings was the weekly manufacturing operations meeting. Dave (who ran manufacturing) and Shoba (who ran test engineering) were so on top things that it was really fun for me to watch them seamlessly drive manufacturing.
As revenue kept growing, we kept revisiting the question of when we needed to switch over to a true manufacturing operations system like the one Randy and Ken were pushing. Dave was so efficient that the crossover revenue number kept getting higher.
I kept thinking, “We have to be approaching the number.” Then Dave kept raising the number.
I know it seems trivial, but the way Dave managed manufacturing still makes me smile to this day.
That’s where the discipline you set on being frugal with the small things pays off. You get everyone on your team being appropriately frugal all the time.