The Opposite of Innovation: Cost Control at Tesla
As an internal memo at Tesla revealed, even the most well-funded companies have to keep an eye on the bottom line.
Zack Kirkhorn’s job just got a little tougher. He’s the 34-year-old Harvard business grad named Tesla CFO in March 2019. In addition to his regular job, which includes stabilizing a finance department plagued by employee turnover, responding to a recent downturn in demand, and leading the electric-car manufacturer into profitability, he now has to review, approve, and sign every single company payment. Every. Single. One.
According to an email written on May 16, 2019 by CEO Elon Musk, the company urgently needs to focus on cost controls so it can reach break-even within 10 months, which is how much time the company has until it runs out of money.
“ That is why, going forward, all expenses of any kind anywhere in the world, including parts, salary, travel expenses, rent, literally every payment that leaves our bank account must be reviewed, confirmed as critical and the top of every page of outgoing payments signed by our CFO.”
The sheer enormity of that job is overwhelming to consider. In the March 2019 quarter, Tesla had over $1 billion in operating expenses and over $5 billion in total expenses. Imagine two people manually reviewing each and every invoice, expense report, card feed, and paycheck.
That’s a lot of signing. Musk says that he’ll pitch in. “I will personally review and sign every 10th page.”
Big bets, big risks
Of course, Tesla operates on a different scale than most companies. Tesla represents a moon shot, as it literally attempts to disrupt a century-old market with its electric, automated vehicles. It has 45,000 employees and a supply chain that sources hundreds of parts per car.
A company like Tesla is a big bet, one that requires an immense amount of resources and willpower. Last quarter alone, Tesla lost $700 million. Few of us can imagine the pressures facing Elon Musk and Zack Kirkhorn.
Cost control matters
At the end of the email to employees, Musk explained the fundamental reason for the cost controls: “This is hardcore, but it is the only way for Tesla to become financially sustainable and succeed in our goal of helping make the world environmentally sustainable.”
His ability to take big bets on radical ideas has been inspirational to a generation of entrepreneurs who have admired his bold vision, his desire to drive massive change, and his work ethic. While few companies will operate at the scale of Tesla, there are lessons to be learned from its experiences, even ones as simple as the fact that cost controls matter.
The balancing act
Growing a company is like walking a tightrope. It’s easy to get off balance. Many companies feel the pressure to reach top-line revenue numbers, especially when they’ve taken funding from seed investors or venture capital firms.
Companies with funding have the flexibility to operate at a loss for some period of time while they ramp up their operations, but they have to keep an eye on the bottom line. Even the most well-funded companies have to make their way to cash flow break-even.
A recent Gartner report on cost management found that “companies that spend for revenue growth while also proactively cutting costs—an approach Gartner calls ‘efficient growth’—significantly outperform those that focus mostly on high growth or reducing costs.”
And yet, many growing companies struggle to control costs. One CFO we spoke to said that while they were hitting their revenue targets, operating cost growth was outpacing revenue growth by 5-10%. No matter what size organization, no matter how well funded, companies need to pay attention to operating costs and cash flow. You can’t always count on additional fundraising or continued growth at the same pace.
An operational burden
Managing spend is a fundamental component of any company’s fiscal responsibility. In times of duress, you might have to take the Tesla approach and manually review every single dollar that goes out the door. But controllers and CFOs say that managing spend is challenging, even in less extreme situations.
Three top-level issues contribute to the challenge:
1. Back-end processing takes way too much time, requiring time and staff for manual tracking, review, and re-coding.
2. Lack of visibility into spend causes inaccurate forecasting, overspending, and delays in decision making.
3. Volume of transactions means that finance can only spot-check data rather than audit it completely, increasing the likelihood of expense fraud.
At CenterTM, we believe that the next wave of technology can help solve these problems. Our integrated corporate card and expense software streamlines the entire spend cycle, using AI and ML to automate transactional processing, audit, and review, while surfacing insights about spend patterns and opportunities for cost savings.
TO THE POINT:
Companies who implement SpendOps have better visibility into spend. They radically reduce the time spent on manual review and audit, while driving better overall policy compliance. They reallocate their time to focus on ways to optimize spend, whether through cost savings, vendor negotiations, or eliminating wasteful expenses. And they can use spend data to develop dynamic policies that respond to their company’s market environment and fiscal culture, to help reach their goals. Learn how SpendOps can help streamline your processes and optimize spend.