Bootstrap financing—relying on your own resources with maybe a little help from family and friends—is a fixture in the start-up world, often of necessity. Until your business has a proven track record, it can be tough to get outside financing. However, as the recent recession sometimes made it difficult even for more-established businesses to access conventional sources of financing, a growing number discovered that bootstrapping can be a viable ongoing financial strategy.
Greg Gianforte, managing director of the Bozeman Technology Incubator, says bootstrapping is a business philosophy that works at all levels, and his experience with the company he started in 1997 proves it. “We were still using bootstrapping at RightNow Technologies 15 years later, right up until we sold to Oracle for more than $1.8 billion and had 1,100 employees.” Among the strategy’s most important advantages in his view: “You only have one set of masters—your customers. You can’t make a fatal mistake, because you can’t spend money you don’t have. You don’t waste time trying to raise money; you just go determine if there is a viable market. You own the entire business when you are done.”
The single most important consideration for bootstrapped businesses is positive cash flow, says Allan Branch, co-founder of LessAccounting, a bootstrapped venture that makes simple accounting software for business owners. “You must constantly ask yourself if you are spending your money in the most effective places and your time on the most effective efforts,” he says. You also must accept limitations that come with bootstrapping relative to funded competitors, which often must attempt “big play” marketing efforts that cost a lot of money, such as sponsoring industry events. “You can’t compete with them on those terms,” Branch says. “You must focus on the things you can do that they cannot.”
“Cash is to a business as fuel is to an automobile—no cash, no go,” Gianforte says. Cash management is critical to the success of a bootstrapped business and requires an outside-the-box approach to financial statements. Most businesses focus on their balance sheet, income statement, and cash flow statement, but those documents are primarily backward-looking. “The most important statement for a bootstrapper is the cash flow forecast, which is forward-looking and provides a framework for making decisions about when you can and cannot spend your precious cash,” he says.
Anything you can do to boost your cash flow increases the odds of success for bootstrapping, says Adam Hoeksema, co-founder and CEO of ProjectionHub , a web app that helps entrepreneurs create financial projections for their business. Some strategies that have worked for other bootstrappers are requiring a deposit for your product or service, offering a discount for payment in advance, and limiting credit extended to customers to no more than 30 days. Kathy DalPra has bootstrapped her business, Bride Appeal Web Design & SEO, and says the experience has been “liberating.” She creates and sticks to a strict monthly budget; calculates exact expenses, including paying herself; and includes a percentage of revenue to invest back into the business for growth. “By doing this in advance, I am clear on the precise minimum income I need to generate in order to cover my expenses each month,” she says. “That gives me a firm goal to work toward from day one.”
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