Jerry Brand, founder of entrepreneur’s charity The Brand Foundation shares some pearls of wisdom…
Bootstrapping has become a popular and meaningful term for start-up businesses over recent years. It also ‘does what it says on the tin’; bootstrapping is really all about shaving as much as possible off of your overhead costs (while spending nothing) by begging, stealing or borrowing from suppliers, family and friends (or whom ever will listen!) Whatever it takes to keep the business overheads as low as possible in the early days is vital. The reality is (if possible), cash should only be spent to confirm onboarding of new customers for your business idea (thereby getting an immediate cash benefit back in new sales).
Start-ups that are funding the development of their business through their own cash flow need to be cautious with their spend – but how much money should be set aside for this process and what should you consider when it comes to your spending? Never forget that cash is king, so start-ups should treat their cash like any sensible person would and only spend what they set out to do. Don’t think that by pushing a bit more cash into the business that this will work or help a situation unless you are absolutely sure you will get an appropriate return on it. That said, the sensible start-up always gets their funding (and risk analysis) agreed up front, when their cash (if they have any) or their investors imagination and confidence in the profits that are to come, is at its strongest. That way, if you do get a downturn, you already have the money available.
Quite frankly, how ever you choose to save money in the early stages of your venture, numbers talk and you absolutely have to know your profit and loss information inside out if your business is to become a success. Get that wrong, the cash dries up, and the business fails, plain and simple. People often talk about ‘margin’, which is the gross profit. The issue is, too many people think they have a margin of 85% (for example), and they don’t focus on what makes that margin up (that’s called the cost of sales or variable costs).
The margin doesn’t burn cash, your cost of sales does that for you. If you focus on sales increases, and your cost of sales is wrong, you may find it’s not long before your FD is telling you that you can’t pay the suppliers or the wages that month and then the game is up. You are against the clock and already too late, unless you have a pot of cash available. And even if you have a lucky escape in the first place, you are already heading towards the next cash crisis by the time you have bailed yourself out of the current one!
Early income is as good as saved overheads
When it comes to where you can bootstrap from, this is really all about good relationships with suppliers, family and friends. The way to get a ‘bootstrapping’ impact from clients could be argued to be via their early adoption for a discounted sale price - so in effect they are being an advocate/early adopter which then allows you the chance to get more customers who are less adventurous to jump in early because you then have a customer reference. Early income is as good as saved overheads in my book!
Saving money in the right places is really all about common sense paired with a ‘sense of the deal’– beware though, as a fool and their money is quickly parted. Of course there is no magic formula to saving money for start-up businesses – the simple fact is, if you don’t spend it you won’t waste it.
Seriously, it can sometimes feel like it would be easier with a partner or early employee by your side. But this is seldom the case because if it’s your idea, you spend so much time explaining it you may as well be doing it yourself. You always think you need some new kind of tool, software or device to help you when the reality is, you find out you just aren’t quite ready for it. Also be aware of external sales people who are selling themselves or their product to you – they may be your first sales person! But remember - you are always the best salesperson for your own idea.
The potential to bootstrap is everywhere
Should a start-up borrow money when starting out? Yes, of course, as cash is what you need to start your business but only if you don’t need to put your house and family’s future on the line in the process. Financiers will want the collateral but supportive investors will take a punt. Borrowing (financiers) is always better than shares (investors), but the risk factor is clearly higher with borrowing because at some point, someone will want their money back with interest (or your house if you haven’t protected yourself properly).
The potential to bootstrap is everywhere; borrow manuals/contracts and rewrite them, use someone else’s cash and equipment if you can by borrowing them, and always think three times about spending every single penny. If you are bootstrapping, you are watching your cash like a hawk. Launching a new business takes courage, as does the whole bootstrapping concept (which is usually easier said than done, but if you don’t ask you will never get). It is easy to spend money, far easier than it is to save it. It is also easy to convince yourself or to be convinced that you need to spend money on something. If bootstrapping is going to work for you, you have to be tough on yourself and tough about every financial decision you make. Understanding where you should spend your cash is one part of ensuring your bootstrapping approach works in the longer term, timing is the other one.