How much office rent should I pay? This question has been asked repeatedly over the years by my clients. Here are four lessons that were taught to me by mentors and teachers in corporate banking.
Since all office rent situations tend to be different, let’s try to narrow down our options. For example, if you work in certain parts of the country, like California, New York, or Boston, it may be very difficult to locate an inexpensive office space due to the scarcity of real estate in these markets. Furthermore, if you have successfully navigated your start-up company over the years to $100 million in annual revenue with $10 million in net income, your office rent expense might not be a big consideration because you still managed to net $10 million.
Let’s narrow down the options for a small business that is growing rapidly. Access to capital is scarce. You might have some customers that don’t pay you and result in a bad debt for your business. You have no financial cushion in your company. Your company’s balance sheet is weak. The list of risks goes on and on. My clients ask, “What percentage of my gross revenue should my office rent be?” The answer, which was taught to me a long time ago, is to forget about percentages. LESSON #1 During your company’s rapid growth phase, do your best to keep your office rent expense as low as you can. What does that mean exactly?
I will give you some examples. LESSON #2 If you are faced with with a high-priced office space vs. a low-priced office space, opt for the lower-priced space. If you have inconsistent revenue and consistently high office rent expense, you will put a tremendous amount of stress on yourself and your sales team. No one can reasonably predict the sales cycle. Prospects routinely postpone major buying decisions for no good reason. Meanwhile, back at the office, you needed to close that deal in order to get some cash in the door, but your prospect had other ideas. You start hammering on your sales team to close more deals “on time” and you risk causing dissension in the ranks.
LESSON #3 If your monthly office rent expense is a larger number than your monthly salary as owner, then you have a problem. Think about this one for awhile and make sure that you don’t put yourself in this position because it never creates happiness. The extra money that you are shelling out in rent probably would have helped you to meet some of your own dreams. Instead, you are helping to meet your landlord’s dreams.
Last, but not least. LESSON #4 As long as it is clean and neat, no one really cares what your office space looks like. History has shown that you will not convince prospects to do business with your company because it has a high-priced office space. The “look” of your office space is not the deciding factor for your prospect. It probably does not even make the list. In fact, it may send the wrong message. The business landscape is littered with the remnants of beautiful, high-rent office space that live on long after the company that decided to rent it went out of business.
History has also shown that if you are dependent on bank loans to fund your growth, your banker will not be pleased when you bring the high-priced office rent conversation to your next lunch meeting. If you have investors that are funding your growth, they simply won’t permit you to raise your fixed expenses when that capital can go to a higher and better use.
Be smart. Keep your office rent expense low until your growing business can really afford higher overhead.
Remember, running a business successfully does not need to be complicated. Keep it simple!
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Manny Skevofilax is a consultant and speaker that helps his clients successfully navigate the challenges of growing their businesses profitably. Since 2003, Manny helps businesses enhance their results by using his experience in strategic planning, financial statement analysis, operations, organizational development, and team-building. His consulting firm, PORTAL CFO Consulting, Inc., has attracted clients from diverse industries in the United States and abroad.
Manny can be reached at 410-808-3441 or via email at manny@portalcfo.com.