One of the most difficult challenges facing the management team of an expansion-stage software company is determining how to cut costs without killing momentum or growth.
A common solution for many companies is to attempt to reduce and optimize operating expenses — the costs incurred as a result of carrying out a firm’s daily operations, but that are not directly attributable to the production of goods or services sold (direct costs are lumped under the label of cost of goods or services sold). Operating expenses typically include line items such as payroll, benefits, travel and entertainment, supplies, utilities, rent, and taxes, among others.
Choosing what to cut back on can be a delicate balancing act, however. On one hand, reducing operating expenses can improve cash flow. On the other hand, cut too deeply and you risk negatively impacting productivity.
For the vast majority of software companies, operating expenses fall under one of the following three categories:
- Sales and Marketing
- Research and Development (R&D)
- General and Administrative (G&A)