Running a lean operation when starting and operating a young business is often necessary. It all depends on what funds were available when founding the business and the urgency necessary to reach profitability. When the cash burn rate is too high, any initial capital invested in the business soon disappears through a slew of planned and unplanned expenses. By running leaner, it can help extend the runway to help you survive until profitability is achieved.
Here are some thoughts around the positives and negatives of running lean.
A Lean Business Means Different Things to Different Industries
Companies that are starting small and need to get through a couple of years to eventual profitability and positive cash-flow must run efficiently to make their capital stretch and avoid excessive debt. They often embrace lean principals to avoid overspending and running out of money.
For lean manufacturing, however, it means operating in a way that often includes just in time production methodologies where products are manufactured based on actual orders, to avoid creating a backlog in production or a glut of existing product sitting on a shelf.
Isolate what running lean might mean for your business and what that could entail.
The Benefits of Running Lean
Running lean works particularly well for companies that are fairly new. If they have a limited cash flow in the early years, then more needs to be done besides memorising the profit and loss statement. Once money has been spent, it doesn’t return quickly or easily for new businesses without many customers placing orders. With a strong focus on operating a business in a frugal manner, what financial resources there are get spent slowly and carefully to avoid unnecessary waste.
Operating more efficiently for traditional office-based businesses could mean upturning the business model in the early years by operating virtually. This removes the need for office rental, an expensive lease purchase, and regular rental expenses. With an office, purchasing office surplus furniture rather than new desks all round and refurbished laptops from is going to save money when staff just need a basic desk and a functional, modern PC for their work.
The Drawbacks and Risks of Being Too Lean
Operating too lean comes with some extra risks. It’s possible to underspend on product development and produce a poor-quality product that fails to impress in the marketplace. Spending up to produce a better prototype or invest more heavily to develop a market-beating SaaS software solution might have had far better results. A balance must be found for where operating lean is appropriate and where it’s not.
For production lines where there’s too much stopping and starting, it leads to inefficiencies in worker production levels and creates considerable uncertainty. With production being less frequently used – perhaps a production facility has multiple product lines to get fitted out – leads to new inefficiencies by chopping and changing. At that point, not having dedicated manufacturing stations to produce individual parts for specific models becomes a hindrance, not a help.
Getting the Balance Right While Avoiding Critical Mistakes
Keeping down the expense total for the month can become an obsession in some small companies. Being frugal to ensure the company’s survival or just to maintain a certain level of profitability becomes an end unto itself. However, business leaders need to focus on right–sizing the expenses rather than being miserly about it to claim ‘lean’ status. This is because it’s possible to go too far with it.
On the flip side, overspending in young businesses is a common cause of bankruptcy or insolvency. A combination of overconfidence about sales combined with a lack of attention to expenses can often lead to dwindling cash balances until the company becomes effectively insolvent.
Finding that happy balance between the two extremes is needed. For instance, on the subject of fleet insurance, you want to get a fleet insurance policy that includes everything that’s important to protect the company’s interests. It’s possible to underinsure a collection of company vehicles by taking out the least coverage to keep the vehicles on the road legally, but you risk significant losses should any drivers get into an accident later.
Instead, companies should be looking to Quotezone, they can get fleet insurance quotes for different levels of coverage from a variety of insurers and pick out the best cheap fleet insurance coverage.
For newer companies that are struggling to find their first customers, build a brand and succeed in the early years, there’s much to recommend about running lean. It’s mostly good news for SMEs that approach it the right way. Seeking value with their necessary spending and not undercutting the investment in products or service development is equally important. Getting the balance right is absolutely necessary to do it right.