In 2025, the economy remains uncertain, so startups face two potential outcomes: sink or swim. 90% of startups fail, with 21% failing in their first year of operation. Trimming operational expenses is especially critical in 2025, so founders should buckle down and prepare for what lies ahead.
So how can a startup founder stay agile and prepare for an unpredictable future? By reducing their cash burn rate and extending their runway. The burn rate's how quickly a new startup spends its VC funding to finance overhead before generating a positive cash flow. The cash runway's the amount of time a business has until it runs out of its cash reserves. Startups with less than 12 months of runway face 38% higher failure risk due to cash shortages.
One of the best ways for a company to execute both initiatives is to rethink its operating expenses (OPEX). Operating expenses are the ongoing costs a company incurs through normal business operations.
What are Operational Expenses?
Operational expenses (often referred to as OpEx) are the costs a company incurs from its day-to-day business activities, such as rent, payroll, and utilities. They differ from capital expenditures, which are typically large, long-term investments or assets. Understanding OpEx is essential for budget planning, cost management, and the overall profitability of your organization.
OpEx vs. CapEx
OpEx covers the ongoing operating costs that support a company's daily activities, while CapEx involves larger, long-term investments in assets like property, equipment, or technology. Knowing the difference helps you prioritize spending, plan for growth, and allocate resources effectively.
Fixed vs. Variable Operational Expenses
Fixed operational expenses don't change based on production or sales volume—for example, monthly rent or salaries. Variable operational expenses vary according to usage or sales fluctuations, like utility bills or transportation costs. Identifying which costs are fixed versus variable helps you forecast spending accurately and manage your budget effectively.
For example, if your company pays $3,000 a month in rent, $300 for utilities, and $200 for office supplies, your total monthly operating expenses come to $3,500. It's easy to see how these costs can add up over time.
Operating vs. Non-Operating Expenses
Procurement processes have evolved dramatically over the past few years, with technology playing a pivotal role in shaping how businesses source and purchase goods. Companies are increasingly leveraging data analytics and automation tools to optimize their supply chains and reduce costs. AI-powered negotiation reduced procurement costs by 40%, with 15% coming from early-payment discounts. This shift towards digital transformation is not just about cost savings; it's also about enhancing the efficiency and resilience of procurement operations. As organizations continue to invest in these technologies, they are poised to gain a competitive advantage in the marketplace.
Operating costs include the following:
Rent
Payroll
Utilities
Insurance
Maintenance & repairs
Property taxes
Travel
Office supplies
Any overhead cost
5 Ways to Cut Down on Operational Expenses
Trimming OPEX is especially critical in 2025, as startups need as much cash runway as possible to stay afloat. According to CB Insights, a startup should have a runway of 18 to 24 months. By reducing operational costs, companies can shave away unnecessary spending, reallocate money where needed, and ultimately improve their overall budgeting processes.
In this article, we're going to cover the top 5 ways to reduce operating costs so your organization can extend its runway and allocate budget to more strategic business initiatives that support a positive ROI.
The 5 points we'll cover include:
Conduct variance analysis
Cut down on Sales & Marketing spend
Reconsider headcount spending
Cut down on non-essential spending
Renegotiate with vendors
1. Conduct budget variance analysis
Budget variance analysis is a critical component of corporate performance management and is a standard practice for finance teams. Variance analysis compares actuals to budget values for a given time period to see how they differ. Once you take a pulse on your company's performance, you can eliminate unnecessary spending and create a cost reduction strategy.
After you've run the numbers, discuss with your team to see which tools and resources they actually need. From there, move on to your suppliers to see which ones contribute to your company's ROI. If they're not adding value or serving an essential function, it's time to cut them.
To help you get started, make a list of operational essentials vs. nice-to-haves and start eliminating the additional expenses that do not contribute to revenue. By eliminating these low-hanging fruit, you can improve your company’s overall operational efficiency and maximize profit margins.
2. Cut down on Sales & Marketing spend
Sales and marketing contribute to some of the highest operational expenses in a company. While we don't suggest completely removing sales and marketing from the equation, you can still reduce spend and invest those resources elsewhere.
Ask yourself, “What marketing and sales initiatives are actually driving ROI?” Then, take a moment to think about your company's ad spend. LinkedIn and Google ads can cost thousands of dollars each month. If it's driving a steady stream of inbound leads, then it may be a worthy investment. However, if your leads are slowly trickling in, it may be time to reduce the budget and allocate it to other projects.
When reviewing spend for sales and marketing, analyze activity to see which channels are performing the best and focus budget on those initiatives. By prioritizing the most impactful activities, your team will be able to cut down on the nice-to-haves and reduce spend on projects that won't move the needle in the short or medium term. Consider reforecasting your budget so your sales and marketing teams are working as efficiently as possible.
3. Reconsider headcount spending
A company's number one expense is its people. While it may seem difficult to cut headcount spending costs, you may want to consider a hiring freeze or refrain from replacing employees who leave from natural attrition to control your spend. These efforts can help improve operational efficiency and cut down on OPEX.
When it comes to the overhead cost associated with headcount planning, reconsider your company's employee rewards structure. This can include how often the company offers salary increases, setting a cap on the percentage someone can receive during a salary increase, offering equity instead of higher pay, and considering other non-essential perks that are given to employees. While this may not be ideal, it's still a better option compared to letting people go.
4. Cut down on non-essential overhead expenses
Have you ever considered cutting back expenses related to your office space? In today's post-COVID world, many companies are moving towards a more remote or hybrid model, which is a good opportunity to cut back on overhead costs while also offering more flexibility to their employees.
Shifting to a work-from-home or hybrid work model is an effective way for founders to save money. From office supplies to energy consumption, these additional costs add up and can make a great impact on your company's overall savings.
To support this point, it's also a good idea to eliminate non-essential business travel. Now that teams have the resources to work remotely through video conferencing platforms and multiple collaboration tools, business travel is an operational cost that can easily be cut from the equation.
5. Renegotiate with vendors
If you choose to stay in an office space, consider renegotiating with your landlord to see if they can give you better payment terms if you commit to longer contract terms.
You also want to be strategic with the tools that make up your tech stack. While software may have an initial upfront cost, it can save the company a considerable amount of money in the long run. Try to consolidate the different platforms you use and only pay for the ones that are the most essential. Once you have a list of your most critical tools, talk with your vendors to see if you can switch to a more basic plan and only pay for the features you absolutely need.
If any of your vendors are unwilling to work with you, consider switching to a more affordable vendor or office space.
How to Manage Cash flows Effectively
When you have a handle on your finances, you manage your company's cash flow more effectively. By reforecasting regularly and following a cost reduction strategy, you'll course-correct as needed to slow down cash burn.
If your Finance team's looking to step up its budgeting and forecasting processes, Abacum is a perfect solution to consider. Our strategic finance software allows companies to forecast and conduct scenario planning as needed, helping organizations stay agile during periods of uncertainty while also supporting strategic conversations around critical decisions.
At Abacum, we help you track your spending, which is a necessity when you're navigating the early stages of a startup. By empowering finance teams to make faster decisions on how they spend their money, founders and CFOs can create more strategic business plans to support organizational growth.
