Bootstrapping your business
Barry Copeland
06 / March / 20
Visitors: 793
Bootstrapping your business. How to develop without significant financial investments
Bootstrapping is to effectively use your own capital, which means that your business can be self-financing. In this article we will look at how to manage your expenses, what the lion's share of costs is and how to control them. It will be useful to learn how to generate income by attracting and retaining customers.
We will cover the topic of business management to determine if you are on the right track in making business decisions. We will consider ways to acquire the competencies you need, which may mean working with other specialists or hiring employees. Although this article is primarily intended for entrepreneurs and startups, bootstrapping methods can be very useful for companies of any size.
What is bootstrapping?
Bootstrapping is the creation and conduct of your business by your own means, without the help of external investors. It’s not a matter of running a business without money, there are simply ways to reduce the basic costs required to develop your own business. This means that you do not easily spend on what seems necessary, but use proven methods to evaluate the cost-effectiveness of a business.
Caring for costs is only part of the solution, because There are business development methods that can have a really positive impact on the finances of your company. You can do what you planned, but bootstrapping methods can significantly reduce investment in business development. Bootstrapping is not only about spending less, but also about taking actions that eliminate the need for some expenses.
You yourself must determine for yourself what bootstrapper you want to be. Since the bootstrapper does not plan to use money from external investors, you will largely depend on the funds available to you, and not on the money that your company needs. By the way, most bootstrappers use self-financing methods to create their own company and achieve the size necessary to attract investors, therefore bootstrapping and external financing methods are not incompatible, they are just different phases of the company’s development.
There are five basic principles that an entrepreneur should focus on when starting a business. Four of them are aimed at the maximum possible reduction in the financial burden of creating a company and its operation during its formation. The last principal concerns the impact that bootstrapping can have on the life of an entrepreneur. We briefly describe these principles:
Cost management. We will consider the most significant costs of starting a business and how to control them.
Attracting and retaining customers. They affect the level of income.
Business management. Want to determine if you are on the right track? If not, then what needs to be done to get back on track?
Acquisition of competencies. An important part of a company's success is having the necessary competencies. Since competency means employee productivity and efficiency, it also means high costs for hiring these employees, which many startups are unable to carry.
The balance between work and personal life. At the beginning of a company’s life, the line dividing work and personal life will be blurred at best. Here we look at how these boundaries can be restored.
Thus, the five principles of bootstrapping include managing costs, acquiring and retaining customers, managing a business, acquiring competencies, and balancing work — personal life. We will discuss each of these principles in the remainder of this article.
Bootstrapping expense management
When you create a company, you are faced with some part of the main costs and your goal here is to find ways to reduce them. As a rule, the most significant expenses are your own salary, the salary of your employees, office rent, the services of external specialists such as a lawyer, accountant, etc.
Not every company is created with less than $1,000, so the best way to reduce your dependence on money is to plan alternative ways to achieve your goals and know that you still get what you need for the success of your business.
Given the above, think about how rational it will be to leave your previous job to start your own business. Even if you sign your first contract, this does not guarantee that you are forced to spend 100% of the time working on your startup.
Therefore, before proceeding to the decision-making phase of leaving, ask yourself the following questions to determine if this is a necessity:
Do you need to devote 100% of your time to the project in the early days?
What specific actions will you do these days?
Is there any way to organize the work of your company in the first weeks or months so that you can manage it while maintaining your daily work?
Are there any deadlines for starting a business or any of its stages? Maybe you are able to set aside an extra month of time for developing a business?
Ask yourself these questions and, if all this is not absolutely necessary for you and if you need to earn a living, then do not take rash steps. Remember that plans are not always completed on time, so be prepared for this and do not put all your eggs in one basket.
Now consider the office space and the first thing you need to determine is what type of space you need. Many people want office space before they decide why they need it. The main function of the office is a place to work with other employees of the company, to be in the same place with subordinates who require supervision or to work in teams, because it is much more effective than the same work online. Other office features are a place where you receive customers or an address separate from your home, which customers see on a website or business card.
It is the second set of reasons that people associate with the need to have an office, but it does not apply to the true needs of the business. For example, they want to have an office space for receiving clients, but in reality very rarely clients come to the office. If there is a reason for meeting at the office, then you can visit their premises, thereby saving them time. They may prefer that you come to their office and present your goods and services.
Before you even start discussing office space, you need to consider whether you can work from home. Starting a business in the living room or in the kitchen is the story of many successful companies, and, in the end, it is the cheapest. Does your personal situation allow you to occupy space without interfering with the lives of people living with you?
If you cannot or do not want to work from home, then you can use coworking services. Nowadays, this direction is very actively developing, which means you should not have difficulties with choosing the right place to work.
If you still decide that you need an office, then consider the option of sublease. Some companies rent large premises with the expectation of rapid growth and the need to recruit new employees, but when their plans are violated, they are ready to lease part of the premises with a lower rental price.
When you start a business, you usually need the services of other professionals, such as an accountant, for financial reporting or a lawyer to help you draft your terms and conditions of the first contract or non-disclosure agreement. You may need to use the services of an SEO specialist and so on.
Of course, all this you can get on the Internet in the form of courses or ready-made forms. But the problem here is not only the time spent on searching or training. It’s just that the information is not always provided correctly and sufficiently on the Internet, and you may need the acquired experience only a few times in your business.
Most people do this for the simple reason that at the beginning of the startup’s life cycle, they don’t have enough money to hire specialists in the above areas. Therefore, to get the services of these specialists without significant costs, you can consider the issue of barter.
Today we use only one type of barter — this is an exchange of money for goods. But you can consider an approach such as creating a financial website in exchange for the services of an accountant or annual financial analysis. This is a great way to get what you need, without paying a dime and not spending days on the Internet, trying to learn all about accounting, and as a result, relying only on yourself, make common mistakes. If you see that you have good contact with someone and would like to work with him, do not hesitate to ask if you can help in any way in something that can be considered compensation for his services.
Before that, we considered the appropriateness of the main costs, but there are many more indirect ones that you will have to face at the beginning of your journey. Two important things to invest in are a commercial website and business cards. If everything is clear with the site, then you need business cards to keep in touch with your customers and suppliers. People will not take you seriously, believing that if you do not have them, you have too few meetings as part of your work.
Now consider the issue of payment for raw materials and equipment. The principle underlying the concept of linearizing your expenses is simple. The later you pay for something, the more time you will have to make a profit, from which you will already pay for something and you will not need investments to finance a startup.
For example, if you need 50 units of raw materials for the production of the first batch of products, but you know that by purchasing 200 units you will get a better price, and therefore save money in the long run. When you start your business, you should be more interested in how much money you spent today. Therefore, do not consider your costs in a weekly, monthly or annual perspective. Buy only what you need right now without paying attention to the attractiveness of the wholesale price.
When you pay for something, it greatly affects the financial management of your company. If you work with your customers or suppliers, you need to manage the time during which payments on bills occur. For example, if you sell your goods or services to enterprises, many of them pay after 30 days from the date of the invoice. And some companies need a few more days to get your bill during administrative processes.
Likewise, you should have enough time to pay your suppliers after the payment you receive from customers. The situation you do not want to be in is to pay your suppliers as soon as you buy something from them and to receive payment from your customers for a long time after they are billed.
The solution to this problem is to make your customers pay earlier, and only then pay suppliers. Thus, you will reduce the time during which you have to freeze funds, and you can even significantly reduce this amount.
The first thing you should do as a supplier is to make sure that all your customers pay upon invoicing, without any additional payment conditions. In some cases, you can ask for a prepayment. If asked to provide 30-day payment terms, this will be the precedent that you can negotiate at the time of signing the contract as part of the financial terms of the contract. Of course, you can provide them with 30-day payment terms, but since the default is the billing date, 30-day terms will only affect part of your customer base.
As a customer, you must agree on the terms of payment with each of your suppliers, and the longer the term, the better. If this is a strategic provider that cannot be easily replaced, then you will not have much influence on the negotiations, but you should try.
Then in our example it turns out that you buy raw materials with a 30-day deferred payment, a month goes to production, after which you pay the supplier, a month to sell the goods, and you receive part of the money or the entire amount from the customers upon delivery. In this case, you will have only one month of frozen funds instead of three.
