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Essential Bootstrapping Strategies
A CPA shares her top tips for self-funding.
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Chances are, you will have to start your company without any outside financial help. In fact, most small businesses, especially new ones, will rely on bootstrapping, or operating without external investment, at some point. Banks will lend only to companies that are at least two or three years old, and investors typically need to see traction and high growth potential before cutting a check. On the other hand, businesses that are more established may want to keep DIY-ing their finances because they’ll maintain full control. Ramona Cedeño, CPA and founder of FiBrick, joined our small business webinar series to discuss saving to start a business, managing cash flow and the non-cash resources that new businesses need to thrive.
Be smart about using your savings.
If you aren’t able to start your business with a low-cost minimum viable product, you’ll have to start saving. Cedeño recommends setting aside money from bonuses or tax refunds. Founders should also consider putting extra money into conservative investments.
One thing she does not recommend is emptying a retirement account to start your business. “I am never going to approve that, ever. It’s very risky, because what might end up happening is, you don’t put the money back, or you miss out on a huge market gain, or by the time you try to invest, everything is super expensive.” You can take out a loan on your 401(k); these typically have low interest rates. However, your repayment on that loan does not count as a retirement account contribution, meaning you won’t get the same tax benefit you would if you were simply depositing money into the plan. Though this isn’t the first financing method Cedeño recommends to clients, she does admit it’s less risky than simply removing the funds or using your home as collateral for credit.
Get going on grants.
Business owners can apply for grants to inject their business with much-needed capital. Most grants don’t require repayment, making them an ideal option for growth without additional debt. These grants may come with other resources, like education or mentorship, key tools for developing your company.
Prepare for debt, then use it wisely.
Companies in their very early stages won’t qualify for major bank loans, but business owners should be thinking about how they can prepare for them as they grow. “Always, always be loan ready” when it comes to your business and your personal finances, advised Cedeño. The first step is separating your business finances. You’ll also want to have your company’s taxes properly filed and paid, usually on a quarterly basis. On the other hand, remember that your personal credit score impacts the kinds of debt financing you’ll be able to pursue on behalf of your business. If you do have a credit card for your business, confirm that the company is reporting your activity to Dun and Bradstreet, the credit agency that monitors business’ credit scores, as this doesn’t always happen automatically. Lastly, be sure your revenue is growing to demonstrate your business is strong and that you will be able to one day repay a loan or line of credit.
“Bootstrapping doesn’t mean to be loan-free,” Cedeño explained. “It just means that you will be able to pay back that loan from cash produced by the business.”
Bootstrapping is about managing money and waste.
“Bootstrapping your business is not just about do I have enough cash to put in my business?” Cedeño advised. “It’s more how we run the business.” Effective self-financing is about managing cash and the resources that can drain your cash, too. Invest in your company by spending time and money on the tasks and products that have a significant return on investment (ROI): things that improve the quality of your product or service, enhance employee morale or generate more revenue. Though it may seem counterintuitive, paying to outsource a service may be the boost to your ROI that you need. “If you’re putting a lot of time in, and you are giving up that possibility of generating revenue at your rate, outsource it to someone else,” she said.
Additionally, founders should consolidate applications and roles where possible. For example, do you need both Asana and Basecamp for your project management? Is it possible to pay one contractor to both pack orders and answer customer questions?
Lastly, Cedeño recommends entrepreneurs choose variable costs over fixed costs so they always have the option of saving more money and maintaining more of their revenue.
Manage clients to manage your cash flow.
Late client payments are a common source of cash-flow problems. Owners of self-funded businesses should create down payments, deposits or retainers. Of course, that may not be possible, especially for newer businesses. Work on getting a mix of clients, some of whom can meet those terms. You should also be consistent with when you send your invoices, to set a precedent.
You should also make sure you’re charging enough. Cedeño has seen plenty of entrepreneurs have cash flow problems because their prices are too low and don’t take into account the amount of time it takes to produce goods or services.
Value your non-cash resources, too.
For Cedeño, bootstrapping is also about getting the most out of free resources, whether educational or communal. She urged founders to look to government agencies and nonprofits for free or low-cost workshops that build business skills. Networking groups can also offer important support, but it’s important to know what you want to get out of those groups and relationships, and what you have to offer. “I recommend that as we’re thinking of getting resources, free education, or programs that are available to us as business owners, that we first put in on paper or on your computer somewhere, the areas of your business that you want to focus on.” Clarity will also help prevent overlap as well.
What does a strong bootstrapped company look like?
Cedeño suggested founders choose three numbers to watch carefully and use as a measure of their company’s health. Some common key performance indicators are gross margin, gross profit and gross revenue growth, but there are other numbers specific to your business you may consider tracking. For example, service-based businesses may choose to measure their average revenue per client.
Generally, a 15 to 25 percent year over year revenue growth is the sign of a healthy company, Cedeño recommends. “But if you talk to a financial coach or business coach, they’ll tell you, you should have huge, big, audacious goals. And that means you’re going to double your revenue.” Of course, you should have a clear plan for reaching those major goals. Additionally, she suggested that a business have at least six months of a new hire’s salary in cash reserves before they start.
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