At What Price?

When times are tough during start-up, you may be tempted to cut every expense under the sun to keep your business afloat. Beware, though-cutting the wrong things could end up hurting your business in the long run. Paul Rich and Seymour Siegel, principals of New York City CPA firm Rothstein, Kass & Co., weigh in on the types of cost-cutting start-ups shouldn't do, as well as the types they should. Listen up.

• Cost-Cutting Mistake No. 1: Choosing cheaper materials for your product. "I know of a company that was selling a garment and chose to use a cheaper material than the material used [for the prototype]," says Rich. The finished garment was not as colorfast as the prototype. "[The owner] had the whole order denied after he delivered," Rich says, "which cost him a fortune."

• Cost-Cutting Mistake No. 2: Cutting back on advertising and marketing. Getting the word out about your company in the early stages is necessary to success. You may modify advertising (i.e., switching from color to black and white) but don't eliminate it altogether, say Rich and Siegel.

• Cost-Cutting Mistake No. 3: Not doing inventory or financial reports when times are lean. "[Entrepreneurs] say, 'We don't need to do this-let's rush; let's not close the [store] for a day,'" says Rich. "[But] without taking inventory, they don't know with certainty if they're making the profits they think they're making." Whether you make provisions to do inventory while your start-up business is open or after hours, the extra expense of time and even extra workers is well-spent.

• Cost-Cutting Mistake No. 4: Cutting R&D during the start-up stages. Make sure you spend judiciously, Rich notes, but don't eliminate R&D altogether: "[For] a start-up, that's what the whole future depends on."

• Cost-Cutting Mistake No. 5: Cutting anything that keeps a customer satisfied. "If you're cutting a cost that will interfere with customers' well-being, their delivery time, the product quality, the communication or anything else having to do with the customer," says Rich, "you're making a mistake." Cut administrative costs instead-renegotiate shipping fees, telephone rates, vendor payment schedules-anything but customer service. Says Rich, "Cut all around [the customer], but don't cut [the customer]."

The bottom line, say Rich and Siegel, is to position your company for success from the outset. "It doesn't make sense to cut down on those things that drive your product to the customer," says Rich. "If the economy turns or your industry turns, you won't grow with the rest of it."