Posted on: 30 April 2015
Let’s imagine you’re a business owner with a great idea. You’re passionate, you’re ambitious and you’re convinced that your idea will be the next big thing.
You’re also short on cash, but you don’t want to borrow money. You want to grow your business organically, reinvesting your profits where possible.
There’s a reason this sounds familiar. 49% of British start-ups begin with less than £2,0001. This model of building a business from nothing, with nothing, is called ‘bootstrapping’. It’s an approach that’s been used for hundreds of years and yielded huge success for many. Like Jeff Bezos who launched Amazon in 1995.
Ian Gordon is Entrepreneur in Residence and Senior Teaching Fellow at Lancaster University Management School. He advises business startups with little cash on an almost daily basis and has some important recommendations for businesses considering bootstrapping.
Forget about profit
If you’re going to run a business with little cash, you can’t afford to mismanage any penny coming in or going out. So, as Ian says, “forget about profit, particularly at the start when cash is so vital”.
Account for every figure that has gone into your bank account and record when and where every penny and pound has been spent. Then meticulously plan when and where you expect money to come in and go out over the next 12 months. Continuously revisit your cashflow, on a weekly basis if you have to, to update, adjust and re-prioritise what your money is doing. For help filling in your cash flow forecast click here.
“…companies go bust because they have run out of cash…”
“More companies go bust because they have run out of cash than because they have run out of profit,” says Ian. “If you are using accounting software, as well as knowing how to generate your profit and loss account, make sure you understand how to generate and manage your cash flow forecast too.”
Don’t borrow unless you have to
Unless you’re in the kind of business where expensive equipment is essential right from the start, try hard not to rack up credit card debt, take out a bank loan or enter into lease or hire purchase agreements. As Ian so aptly puts it, “don’t buy what you can rent and don’t rent what you can borrow.”
“…borrow from yourself for nothing…”
“Instead, rent from yourself for nothing,” says Ian, by using the computer you already have and your spare room as your office. If you need a cash injection, consider asking family and friends if they’d support your business venture and agree the terms of any informal loans in writing.
Choose an overdraft over a loan
If your business requires you to spend some money before you can earn it, Ian views an overdraft as a good way to get access to cash without getting complacent about your borrowing.
“When managed well, an overdraft can be a stick to beat yourself with when managing your cash,” explains Ian. “As an overdraft is repayable on demand by the bank, it forces you to think about the effect your actions today will have on your cash position tomorrow.”
“Loans can make you lazy…”
In comparison, Ian sees small businesses that take out a loan becoming complacent about its cost. “Loans can make you lazy because before long you start seeing it as a fixed cost,” he explains. This eats into your daily cash balance, even when you don’t need it.
Set your first profits aside
Setting up a buffer in case things go wrong is the equivalent of an overdraft but there’s no risk of it costing you anything if you need to dip into it. Create your buffer by setting aside your first profits in a separate account. Keep adding any profit you make until your pot is big enough to sustain your business for six months. Then leave the money there and start reinvesting your profits back into your business to help it grow.
Focus on selling, not margins
If the thought of perfecting a sales pitch, cold-calling and travelling the country promoting yourself fills you with dread, you’re bootstrapped business simply won’t succeed. That leaves just one way forward: find a way to become the best salesperson.
To achieve this, you may decide to invest in some sales training. You may prefer to learn on the job and from your mistakes. Whichever you choose, own the sales process, be honest and trust your instincts – sometimes walking away from the biggest deal imaginable is the right thing to do.
“…a lower margin sale can be better…”
Once the sales start coming in, Ian believes in focusing on the sales where the cash comes in faster, rather than on those with the higher margins. “A lower margin sale can be better than a higher margin sale if you’re being paid more quickly,” says Ian. “Concentrating on making the sale and collecting the cash means it’s in your account faster and so available to be used elsewhere in the business. As the company grows, cash becomes less critical, allowing you to focus more on the margins.”
Invest in marketing from day one
Investing in marketing doesn’t have to mean wasting your hard earned cash before your business is ready to sell. However it does mean spending time (days if necessary) finding the right channels through which to promote you and your business in the right places to help drive those all important first customers to your door.
“You’ve only got a business if a customer says you have.”
“Profile is really important,” says Ian. “You’ve only got a business if a customer says you have and buys something from you. So make sure that you provide enough information for people to find you and know what you can do for them.”
The key marketing channel bootstrapped businesses should consider is social media because it’s free. Find out which of Twitter, Facebook, Instagram, Pinterest, Google+ and LinkedIn your customers prefer to use to buy what you’re selling. Devote time to working out what sort of conversations they’re having and who has the loudest voices in the community. Get to know the key players and share relevant information about what you do.
You can also consider giving your local and trade press stories with good headlines that will sell their publications. If you’re a good writer, give online publications content, or offer your services as an expert contributor in your field.
Build social capital
Networking is the bread and butter of bootstrap business success. Not only does it build up your customer base but it also supports efficient working with other stakeholders, including suppliers.
“We’re all human.”
“Build relationships and earn their trust with suppliers,” advises Ian, “by getting to know them as people. We’re all human and we all like social interactions.”
By this Ian means getting to know their responsibilities and their challenges. This makes negotiations easier and more effective, allowing you to be proactive about collecting cash more quickly. “Negotiating with creditors, as well as debtors, lets you time payments coming in and out of your bank account, preventing you from running out,” says Ian.
Realise the power of a mentor
If you’re going to start your business on a shoestring, you’re going to need all the free advice you can get. Whether this be from family and friends, a former boss or even someone in your industry that you respect and admire.
A mentor is someone who has been where you are, done what you’re striving to do and who is willing to spend time imparting their experience and wisdom on you. Their ability to see the opportunities and challenges that face you from a different perspective can make all the difference. We believe that every small business needs a mentor – find out more about the power of mentoring here.
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