Cash flow

Think of your natural response for the following question -
You need to have a new server to your start-up and you have two options:

1. Buy a server for $2400
2. Rent a server for $200 a month

Which option will you choose?

Most people I know will use the following calculation:
After one year the "rent" option will be more expensive than the "buy" option. Since a server typically can be of service for 3 years without any technical problems, it would be best to buy it. The alternative is clearly flushing money down the drain.

Makes sense, doesn't it?

My answer would be different though. I would also consider my budget and mainly my cash flow. The reason is simple: a start-up typically has a very modest budget. During it's very early stage, the budget might be only tens of thousands. For the sake of the discussion, let's assume it is $50,000.

Now, do you still think it is obvious to spend in one shot almost 5% of your budget for a server? Are you so confident you have more than one year to enjoy it's benefits and the money you think you will save? What about other needs you have which you need money for? What if during this year you will find out that you need a different server?

When a company has a negative cash flow and unless it has much money in the bank to compensate for it for a very long time, cash flow is the #1 consideration when you manage your budget. Savings for the long run is much less important.

I would like to give you more examples of typical mistakes

• Renting space - taking a long duration commitment (say 2 years) in order to save money per month.
• Choosing a wrong credit card processor to save 1% per transaction but having to deposit and secure money in bank as an insurance.
• Hiring a new employee when you can surely manage with an outsource solution (such as QA)

It is painful sometimes since you know you pay more than you should but this is exactly what you should do

Manage well,
Amir