Have you heard of Fab? You probably haven’t, because, after spending $200 million of the $336 million they raised in startup capital from venture capitalists in less than two years, they ended up having to lay off two-thirds of their staff and were ultimately bought by an Irish firm for $15 million. That’s what happens when your startup doesn’t prioritize spend visibility.
The problem — known as high burn rate, or spending piles of investors’ cash — is common among startups, where leadership tends to prioritize innovation and rapid growth over number crunching. The result is that companies end up spending massive amounts of money and not realizing it until later.
Spend visibility ensures that you know who’s spending what in the company, what they’re buying with it, and, crucially, whether it fits into the budget. That way, you don’t wake up one morning and realize that your company has spent enough money to fund the GDP of a small country, and you’re just now noticing.
How Money Leaves Company Accounts Without Anyone Noticing
It might seem ridiculous that a startup can spend hundreds of millions of dollars without anyone realizing until the money is long out the door, but it’s easier to pull off than it sounds.
Spend isn’t usually centralized in most companies — there are dozens, even hundreds, of employees who are authorized to spend on supplies, equipment, and software; make the decision to hire more staff; and sign off on negotiated salaries.
But especially in startups, you have lots of employees making lots of purchasing and spending decisions. You need that shiny new office, the new computers and workstation furniture, and the new breakroom with its appliances.
And, of course, you need to hire new staff — for many startups, rapid growth becomes so exhilarating that leadership never stops to think about what it costs.
Even in more established companies, it’s not uncommon for staff to, for example, subscribe to a new SaaS solution without canceling the old subscription to the previous software tool.
Someone might place an order for equipment or cloud space or similar, and then, when they don’t get their order met soon enough, they’ll go ahead and purchase it themselves, thinking that the purchasing manager has misunderstood the urgency of the situation or merely forgotten. Meanwhile, the purchasing manager places a second order for the same stuff a little later.
Duplicate payments are a huge problem for spend management in companies of all sizes, but as your startup balloons rapidly in size and more employees bring more opportunities for miscommunication, you’re also getting more chances to overspend needlessly.
What Spend Visibility Is and Why It’s Important
Spend visibility allows you to keep track of who’s spending what around the company, and a good spend visibility tool will aggregate and centralize that data to make it more accessible.
You need to track spending on salaries and benefits, equipment and supplies, software, business teams, vendors and suppliers, travel, and more. It’s especially important for startups to track spend visibility because of the large amounts they tend to raise from venture capitalists, their extensive spending needs, and their typically rapid rate of growth.
It’s common, even expected, for startups to burn through huge amounts of venture capital before they become profitable.
Your startup will need to buy everything that your company requires to go from being run out of your garage to competing with the big boys in a gleaming downtown highrise. Spend visibility and spend tracking can help you get there without going broke.
It can help you budget for supplies and office equipment, so that you can find ways to save money where you can and have more funds to keep your startup going until it’s profitable.
You can manage to hire so that you don’t end up with a bloated, unwieldy company in which managers feel incentivized to hire to solve every problem.
It’s easy to hire more staff, but if you hire too many people at once, you’ll spend too much money and either go under or have to bring in a CFO to structure massive layoffs — and laying people off is always harder than hiring them.
Besides, you’re still more likely to fail if you get to that point, or to at least lose much of the innovative edge that made your company so promising in the first place.
Most startups tend to burn through cash super fast — and that’s not always a good thing. Spend visibility is the answer. Keeping a close eye on what your company is spending and why can mean the difference between growing your startup into an industry contender, or crashing and burning instead.