There’s a lot of commentary on how to start a business, how to court investors, and how to sell a business. One theme that consistently falls through the cracks, however, is what it takes to, and what it is like to start up and run your own company on the ground level. For many young entrepreneurs, the thought of using investor money to help build your dream sounds like just like that — a dream. And while generating funding and starting out with a size-able amount of seed money can help a business get off the ground quickly, there are down sides to bringing others on board with the business that invariably will become ‘your baby’. If you have just taken the plunge, or are about to, and for those thinking about bootstrapping (even for business people that are just trying to save), I’ve laid down some tips that I’ve learned by doing, as a young entrepreneur and investor.
P&L / Project Costing
This is very important. Upon starting your business, it should quickly become apparent that you have some customers that are more profitable then others. Ones that take less time and generate more profit. Conversely, there are the customers that take more time, and generate less profit for you. Breaking down each customer into its own profit & loss (P&L) statement helps you understand who they are and what characteristics they have in common. Once you’ve identified the characteristics of the ‘high profit’ customers, you can then go after them. It’s worth spending the time to analyze your clients in a cost-benefit way, so that you can scale your business’s operations and your profits.
Generate Financial Reports Monthly
“What you measure gets managed” Peter Drucker once quipped, and that is why its important to review your financial reports monthly (if not more often). Much like it is important to monitor the profit/loss of your customer base, it is important to see where the money is coming and going each month. Many companies start out with several types of services and products they provide/sell. Sometimes they are not always profitable. If you are able to measure efficiency of operations, and profitability, etc., it will become easier to manage and improve upon each.
Raise Money as Late as Possible
Launching a company teaches you how to sell. Raising money teaches you how to spend. I’m not against raising money to grow your business, but ensure you know exactly what you’re going to spend on it, and act as if you don’t have money to keep the creativity coming that’s so prevalent when you’re bootstrapping your business. Also, raising money later can save you a lot of money in the long run, and will allow you to run and shape the business in the way you want, for longer.
Salaries for Start-ups
As a start-up you want to keep your salary cost low and compensate either by performance bonuses (goals) or by equity. Start-up companies should never be paying market rates for their first few hires — sell the dream! For every company with a great product in its nascent stages, there are hundreds, if not thousands, of young, able and energetic individuals with the skills necessary to get the job done — and a willingness to sacrifice early on, to be a part of something that they a) have ownership in; and b) that they believe in. Their reward: a slice of the pie. All it takes is an introduction.
Keep Your Fixed Overhead Low
In today’s economy it’s important to be able to scale up and down your business to reduce your fixed overhead. Things like software as a service where you pay “by the drink”, ex: phone systems (Ex: www.grasshopper.com), monthly subscriptions, contract help, virtual assistants. These are all invaluable services, provided either via the cloud, or part-time independent contractors. What once took several, paid employees do do can now be done in several hours. These services exist for the person for whom this article is written – why not take advantages of them?
Access to Capital / Savings
It’s always a good idea to have access to capital, either by retained earnings or line of credit just in case you come across hard times. The best advice I ever got was, “always ask for money when you don’t need it. If you can get it for cheap, take it – you never know when you’ll need it.” It’s common sense for individuals to have six months to a year’s worth of earnings aside as an emergency fund. This couldn’t be more relevant than it is for a young entrepreneur (albeit, not always doable), as most new businesses have unpredictable cash-flow.
Focus on Profits
It’s tempting when you start your company to get sales from anyone willing to buy, but don’t do this at the expense of not making a profit. You need to ensure you price yourself appropriately so that you can reinvest in growing your company. Yes customers are important, but they need to be profitable or you won’t be in business for very long. Simply, think ‘profits’ not ‘sales’.
Sign Your Own Checks:
Its tempting in the early days to “pre-sign” checks and hand them to your accountant, lawyer, employees to buy things – big mistake. Remember, that when you start a business of your own, each cent of that money is yours. Think of it as your money. No one cares about how it is spent quite like you.
Don’t be Afraid to Barter
I’m assuming that your new business provides value to your customers, so there’s a chance that someone would be willing to exchange your product or services for theirs. This is a good thing. Think about the market value of what you are trading, and the time involved and if it makes sense don’t be afraid to scratch someone else’s back. This can also be a good source of referrals.
Have Your Customers Finance Your Business:
I call this strategy “Customer Financing”. Get your customer to pay you for your efforts. Deposits, pre-pay, or even better payment terms. No one, at any company, regardless of its size, likes to be the bill collector. It not only is a painful process, but it also can slow down growth if every customer is late on payment. If you can find customers that believe in your product, and are willing top pay up front, you are on the right track.