Imagine for a moment a completely debt-free business. No loans to payback. No investors to answer to. Imagine a completely self-sustaining business. A business funded purely by the cash flow your business produces.
It did to Joseph, a long-time client of mine. Joseph owns a very successful residential construction business and has gotten to the point in his business where he’s ready to let it go, ready to drop back from the day-to-day running of things. Of course, Joseph is a an entrepreneur at heart so retirement is not an option. In fact, he’s already set his eyes on his next venture.
When he started his construction firm some 20 years ago, his business was funded by two investors and a sizable bank loan. While he was fortunate enough to eventually pay those loans off, this time he wants to do things differently. This time he wants to go at his business in a totally new way: debt-free, right from the start.
Joseph and I have been talking about this a lot lately; about what it takes to bootstrap your business out of the gates, and I wanted to share some of what we’ve come up with in case you’re considering the same thing.
What you need to start a bootstrapped business
How much capital you’ll need to start a business depends on your business model, your service or product, and whether you need employees, vehicles, a building, etc. So while we can’t give you a dollar figure, we can give you some parameters. Your list of absolute necessities will include the following:
- Technology You will almost always have some initial (and essential) technology needs. These can include phones, computer equipment, Internet access and a website. No one can say, “we aren’t an Internet business” anymore: every business is an Internet business to some extent.
- Administrative and legal costs These can include attorney fees, business license and possibly incorporation fees, as well as permits, insurance, supplies, etc. The key is to invest in the absolute necessities and only get other items as you need them.
- Wages and benefits If you start and operate your business venture as a solo operator then these will only come as expenses farther down the road as you grow and expand. However, if you must have people working for you (even if only part-time or outsourced) then these costs, too, will be essentials.
- Costs of doing business If you are a service business then these costs may be minimal. If you’re going to manufacture the world’s best widgets, then you will have to invest in some initial equipment, materials, shipping and delivery costs, and so on. It is possible, too, that your business model will require physical space apart from your garage or home office. Again, the key is to keep it to an absolute minimum while providing the functionality needed to do the job.
- Marketing and promotion “Build it and they will come” might work in the movies, but rarely does it work for a startup business. While you don’t have to break the bank on advertising and promotional activities, it is almost certain that you will have to invest something to create awareness and begin generating qualified leads. And the process is never-ending: promoting your company should be a non-stop function of your business operations. But don’t fret! It’s possible to do this on the cheap. I have a client who has successfully created and implemented a marketing strategy that involves almost no outlay of cash as it is built primarily on a referral process, leveraging social media, and optimizing networking opportunities and public relations activities. (The big plus in this approach is that the revenue she would normally expect to budget for marketing and advertising can now be funneled into the bank or into hiring additional staff to handle her ever increasing client base.)
One of the strategic aspects of successful and effective bootstrapping is to operate from the mindset of “do without until you know you need it.” While a set of office furniture for the newly minted CEO might give an aura of respectability, it isn’t really necessary. And it’s expensive. Every dollar spent without careful scrutiny is probably a dollar lost.
Money isn’t everything
My client, Joseph, is lucky to have the business experience and the benefit of a coach to guide him this time around. But he’s also embarking on a whole new adventure by attempting to do it without financing. It’s most definitely not an undertaking to venture into lightly. In fact, there’s a ton of planning that should be taking place before you ever spend your first precious startup dollar!
It’s not enough to simply determine what you think you need to spend your limited capital on – you need to know why. Here is a short list of some of the strategic considerations that should be undertaken to help you make your bootstrapping decisions more effectively:
- Track, quantify, and review: Monitoring and reviewing the results of your plan as you move forward is critical to making needed course adjustments, improvements, etc. This should be a scheduled process that occurs regularly such as in a monthly meeting.
- Determine tasks: Even if you are a business of one, manage yourself and assign yourself specific tasks with a planned schedule. Plan your work, and then work your plan. If you do have employees or partners then it is all the more critical to clarify objectives and accountabilities.
- Operating budget: Don’t worry about getting it right at the outset, just get it! It is critical to have a clear sense of what your expenses are and how much you will need to achieve your breakeven point.
- Marketing plan and sales forecast: Determining how many customers you need to attract and how much revenue they will generate is critical for your financial planning, particularly your cash flow.
- Cash plan: Think of this as your budget for cash. Knowing how much cash you need on a week-to-week or month-to-month basis is another essential that your operating budget will help with. Knowing how much cash to expect each week or each month is part of the function of your sales forecast.
While this is certainly not a comprehensive list, the point is that an essential aspect of determining your spending is to have a clear strategy and plan before you ever spend a single dollar!
Joseph became interested in bootstrapping his new venture because one of his mentors, another contractor, had successfully done it. Once he got the idea in his head, his research began. He asked every business owner he knew, he tapped his construction association group, he read books, he grilled his E-Myth Business Coach (me!). Ultimately he decided it was indeed possible.
The beauty of bootstrapping your own business venture is that it is a venerable and well-established approach that dates back to the beginnings of commercial enterprise.
In other words, you’re not alone!
Many others have started their own businesses successfully by bootstrapping their startups. They have a collective wealth of experience and knowledge and you would do well to tap into this wealth early on. Remember, a smart man learns from his mistakes, but a wise man learns from the mistakes of others!
So go ahead, talk to other business owners. Talk to the trail blazers. Read everything you can that’s relative to your vision and your plan. Educate yourself and consider any viable options before you take the plunge.
While it may be a challenging road to travel, imagine how good it will feel to know that you did it on your own steam, by your own “bootstraps”!