More Creative Cashflow Bootstrapping

Thursday, May 17, 2007 at 9:00pm by Site Administrator

There are all sorts of ways to bootstrap your cashflow and a multitude of ways to track what your cash flow might be at any given time. I’ll admit that I never went to business school, and anyone I know who did never discussed cashflow planning with me. So what I’m presenting here is raw because it’s self-learned. It gets the job done, and you can refine the process as you need to.

In this post, I’m touching on two different ways to look at your cashflow – in other words, simple planning using diagramming. The business scenario is as follows:

  1. You have a startup business that is essentially self-sustaining, though the income is small.

  2. Your research indicates that if you add new business units, which can be operated independently, you’ll increase income. I’m illustrating to sub-types here.
    1. Type 1 generates a lump sum of income from sales of product or services.
    2. Type 2 generates a lump sum of income from sale of the business unit, at the end of a cycle. As well, it may generate monthly income. Examples of this are dividend-bearing stocks, rental properties, and income-producing websites.
  3. Four different types of business units can be purchased at (A) $500, (B) $500, (C) $2000, and (D) $5000.
  4. Monthly income per unit, if any, is approximately 1/10 of the purchase price.
  5. Even if a business unit generates less than the expected monthly income, it can be sold on the market for it’s original price, possibly more, depending on any value accrued. For the sake of example, $500 units return $600 (120%), $2000 units return $2600 (130%), and $5000 units return $7500 (150%).

This is a purely fictional example. Assumptions are that you have both the time, space, or other wherewithal to expand your business with new units and manage them neatly. All that remains is to determine if you have the capital at the right time, which is what some of the diagrams below will help you accomplish.

I hope i’m not making things too complicated by combining the description of two different types of business (products/services or stocks/property) simultaneously. One way to look at your cash flow is shown in the first diagram below.

Business unit costs - single phase

The above diagram suggests that you have $6K in capital and a $4K loan from family members for a total of $10K for expansion. That $10K is split into purchasing 4 different business units at $500, $500, $2K, and $5K, for a total investment of $8K. That leaves $2K in capital in reserve. Each unit may earn $50, $50, $200, $500 per month, respectively, if it’s that type of unit (as described above). Even if not, each unit at the very least generates $600, $600, $2600, and $7500, respectively, for a total of at least $11.3K in return from the $8K invested. Again, depending on the type of business, the $11.3K may be from sales of product/ services or from selling off the unit. (You’ll have to factor that in when deciding how to diagram your cash flow planning.)

That diagram only shows us a quick view of a single expansion phase. What if we want to keep expanding, keep buying units? Let’s get specific here. I’m ignoring any monthly revenue and looking only at total return per unit. Starting at month 1, we start buying and selling (or whatever). We never buy so that we get into negative cashflow, and the revenue of each unit is rolled into purchasing additional units. The whole point of the timeline excercise below is to ensure that we’ll have enough cash at all times to manage the expansion. (Note: a spreadsheet is far more useful for a final tabulation, but sketching out a timeline of phases gives you something rough to start with.)

Here’s a summary of expansion rules:

  1. Each unit that we buy will expire in four months, either because its resources are exhausted or because we will sell it off.
  2. We start a new phase four months after the start of the previous phase.
  3. Two consecutive phases will be overlapping, time-wise.
  4. We’ll never buy or sell more than one business unit at a time.
  5. Because of the conditions of this example, starting in month 5, every beginning of the month will see the sale of one business unit in one phase and the purchase of another unit in the next phase.
  6. For simplicity of example, assume that we buy and sell business units (or expire them) on day 1 of each month. We have to do this, else get more granular and do planning on a daily rather than monthly timeline.

The “four months” in the expansion rules is not arbitrary. I’ve selected it intentionally, and if you don’t see why, I’ll explain below the diagram. In the top row of the cash flow timeline is the label “cash:”. Those numbers represent the total cash on hand at the beginning of each month. So at the begining of month 16, we finally surpass our initial $10K in capital. At the beginning of month 20, we’ll have sold/ expired our final expansion unit and have $15.2K in capital.

In the second row is the label “revenue:”, which is simply the monthly revenue. This is where some people get tripped up. So let me explain the first several months:

  1. Month 1: On day 1, we spend $500 ($0.5k) on a business unit, type A.
  2. Month 2: On day 1, we buy a type B business unit for $500.
  3. Month 3: On day 1, $2000 on type C unit.
  4. Month 4: On day 1, $5000 on type D unit.
  5. Month 5: On day 1, phase 2 starts, but phase 1 continues.
    • Phase 1. Four months have passed, so we sell the A unit from month 1 for $600.
    • Phase 2: Buy a new type A unit for $500.
    • Total expenditure is -$100, meaning we gained $100 (+$.1k).
  6. Repeat this cycle of buying and selling as necessary, until your expansion is over.

Business unit costs - cash flow cycles

Not by coincidence, if we’re selling a type A business in phase N at the start of a given month, we’re also buying a type A business in phase N+1. That’s because a new phase starts in the month immediately after the buying portion of the previous phase ends. If you have the capital and want to get aggressive in your expansion, you can squeeze the phase timelines together. So phase 2 would start at the beginning of, say, month 4 instead of 5, and phase 3 would start in month 7 instead of 9. That means you’d be buying at least 2 units in a given month. If you have lots of capital and the wherewithal to handle lots of expansion, then you can get even more aggressive with your timelines.

Again, I’ve concocted this example purely to illustrate some of the diagramming methods that I like to use. I’ve tried to keep things simple. But the principles here can be applied to plotting cash flow over any timeline, for any expansion schedule you’d like to implement, and for any number of types of units, etc..

Start by sketching out the “single phase” diagram at top, then plot out the phase overlaps and determine your total number of months. Once you’ve done this, you can take the revenue figures you get and throw them into a spreadsheet for later crunching, for your records, or whatever. The spreadsheet helps if things change, if unit costs or revenues per unit change.

Bootstrapping Your Business Cash Flow

Wednesday, May 16, 2007 at 8:30pm by Site Administrator

In bootstrappers do not think linearly, I hypothesized that successful entrepreneurs find more than one way to build their cash flow, revenues, and thus ultimately their profits. They don’t just save some money into a bank account, they find ways to leverage what they have into more.

Bootstrapping a business takes creativity in financing and generating cash flow. I’ve created a stairstep diagram below to show a generic example of how to build $5,000 into $200,000.

Cashflow stairstep diagram

Let’s say that the first $5,000 in operating costs can get you to $15,000 in savings from sales. (Keep in mind that you have to find a way to pay your bills and put food on the table. We’re talking purely operating cash flow here.)

So you invest that $15K into equipment, personnel, materials, services, or whatever you need in order to not only recover that $15K but also an extra $10K, for a total of $25K Whatever you’ve purchased, if it’s equipment for example, might also be reusable in later stages. The investment allows you to boost earnings temporarily.

You keep “stairstepping” your investments and savings to build up to $200K in savings. The general action plan, then, is something like this:

  1. Save $5,000.
    Save your starting capital however you can, whether from a full-time job, cashing in a retirement account, or whatever you actually feel comfortable with.

  2. Invest $5,000.
    Start the business, buy whatever materials or services you need, and keep the business going to the next stage.

  3. Save $15,000.
    Through normal operations, save up $15K in investment capital from startup. This includes recovery of the initial $5K, of course. Note that the time between this step and the last step might actually be the greatest of all the stairstep stages. But if you can get to this stage, each successive stage is potentially easier.

  4. Invest $15,000.
    Invest the $15K in savings into whatever materials, products, services you need to boost your earnings from its current state.

  5. Sell $25,000.
    Sell $25K worth of your services, including the $15K you invested in the last stage.

  6. Save $50,000.
    Using the $25K earned in the previous stage, build up your business by reinvesting earnings until you’ve saved $50K.

  7. Invest $50,000.
    Invest your saved $50K in equipment, etc., as you did at the $15K stage, to boost up your business revenue.

Steps 1-7 are only part of the process shown in the diagram. The other stages are just a repeat of them, until you can stairstep savings and earnings into $200K. I’ve not given any specific example of how money is earned or what it’s invested in because I wanted to focus on the process. This process can be applied to any startup business, and I’ll be giving case studies in the future. The key concept to understand is that while you may feel that you’ve lost time between startup and the first time you save, in this case, $15K, each successive stage will likely take less time.

Cautionary Tales From A Fellow Entrepreneur

Monday, May 14, 2007 at 5:56pm by Site Administrator

Life has taught me some hard lessons in business. I come from a wholly entrepreneurial family, and I’ve been the least level-headed of us, though that’s changed. So I thought I’d share with you some of what I’ve learned, in hopes that you don’t do the same thing – or at least know a few things to watch out for. The short version, for those of you that are busy, is my list of past business mistakes:

Creative cash flow states

  1. Bulk buying.
    Buying a service or product in bulk, just because you think you may need it, or because “you save money”.

  2. Spending spree.
    Buying things now that you don’t need yet.

  3. Ten tons of parsley to throw away*.
    Buying things you don’t truly need for the business. [*Flinstones reference, when Fred and Barney bought a restaurant.]

  4. Who are you?
    Filling the wrong niche. Are your services or products really needed?

  5. Where am I?
    Filling the wrong geographic niche. Maybe they’re not needed where you’re trying to sell them.

  6. Um, what’s that?
    Not researching a market properly.

  7. I gave at the office.
    Promoting through the wrong channels.

  8. The stock market fell a million points.
    Not taking general economic indicators into account.

  9. I gave at church.
    Not considering cultural/ community preferences.

  10. I don’t know you from Adam’s left oxen.
    Assuming that people you know are going to be as excited about what you’re offering as you are. It stings, but it’s true. And some may even be jealous and try to sabotage you – especially if they’re starving musicians.

Some of these apply whether or not you are bootstrapping a business. However, some are specific to bootstrapping, because you’re working with a tight budget. A bootstrapper doesn’t go out and buy 4 weeks of advertising even if the capital is available, and even if there’s a discount for multiple weeks.

Instead, a bootstrapper buys one week of online ads, then reinvests any excess income earned that week, as a result, into the next week of ads. If the advertising seems worthwhile, then after a few weeks of proof, a block of advertising might be purchased. This is true for online or offline businesses.

This method is far cheaper, despite appearances, if the ad placement is untested. Had 4 weeks of ads been purchased upfront and the effort turned out a dud, and/or there was a cash emergency, the money would be a loss.

This is a lesson that I’ve learned the hard way twice before, in businesses that failed. In one band-booking business, I bought advertising in bulk, only to find that after committing to a half year to get a nice discount, that I couldn’t get people out to the shows, even with good word of mouth. At the time, there was a recession, and my research after the fact shows that clubgoers in smaller cities would often rather pay $10 for a DJ and recorded music than even $3 for a live band they’ve never heard.

In the next business, I spent $35,000 on a very nice, redundant audio recording setup, with 9 guitars and basses, 5 synths and various percussion items. I went crazy, thanks to being fortunate in scoring some nice contract programming/ webmastering work. So I thought I’d build up my multimedia consulting facet, in hopes of eventually expanding to digital film production.

At the time, I also spent $1500 taking a “composer” course for Film and TV soundtracks and ran into some technical difficulties. While I was sorting those out, I tried to offer my audio engineering services for free mostly to local musicians that had known me for several years. Except that with the economy the way it was after 9-11, they were suspicious of someone giving away services. Starving musicians are typically suspicious of such behavior, anyway, in my observation. For that and other reasons, I ended up selling all my equipment (or having it stolen from me by one musician) for about thirty cents on the dollar.

This latter business actually bankrupted me. Hard lessons learned. Which is why this time around, I’m bootstrapping my online publishing business the right way, and actually managing to keep things under control. Bootstrapping teaches you that control, out of necessity.

Bootstrapping a Business

Friday, May 11, 2007 at 7:53pm by Site Administrator

Diagram - transition of business financial statesBootstrapping does not mean that you can never accept capital/ loans. It simply means that if you don’t have what’s necessary at present (subscribers, revenue, product) to get a loan or investment capital, that you bootstrap your way to that level first. Some entrepreneurs start off bootstrapping, prove a certain level of success or show the solid potential of their startup, then have venture capitalists making offers. So being financed can and often is a state in the path from nothing to success. Whether you start at a bootstrapped state or a financial state, you can make it to the success state. However, call me biased, I believe that bootstrappers stand a better chance of success because of raw desire and the need to succeed. It may be bumpy along the bootstrapped path, and many mistakes made. However, it’s those mistakes made early that quickly teach you how not to do something. If you start with a whole whack of capital, it’s easy to mask the mistakes, thinking that having money will get you to the finish line sooner. Abraham Maslow’s Hierarchy of Needs would suggest that entrepreneurs that have lots of capital have no overwhelming desire to move out of their established comfort zone. It’s probably similar to the reason that most salaried employees will stay that way. Those who do break out of that thinking are often the innovators of society. Or at least innovative on there way to success. One example is Canadian Kyle MacDonald, who wanted a house for himself. He started with a red paper clip, then kept trading up and up for increasingly more valuable items. Between his website, One Red Paperclip (on free host Blogspot), word of mouth, and the occasional classifed newspaper ad, he always found someone to trade what he had at present for something "better", in his estimation. Exactly one year to the day that he started, he had his house – albeit in the bitterly cold Canadian province of Saskatchewan, but he’s happy. Now imagine if you could apply Kyle’s principle to bootstrap a business. Start with very little, maybe a service you can perform, and offer it for something else – maybe equipment, furniture, services or even money. Reinvest or use whatever you get, and refine/ improve your product or service. Repeat the process. The accumulation may be slow, but a controlled process is necessary if you don’t have loads of capital. And these days, there are hundreds of free web applications for entrepreneurs and freelancers, to help you get started.

Bootstrappers Do Not Think Linearly

Friday, May 11, 2007 at 6:40pm by Site Administrator

Human beings are capable of thinking in hyperthought, bouncing from one related idea to another. Unfortunately, we’re usually taught to bind our thinking into linear cause and effect. It’s probably the primary reason why most people do not think themselves capable of being successful entrepreneurs. And they really can’t. Those with the entrepreneurial spirit either innately know how to take advantage of ideas that spark in their minds, or they learn how.

Bootstrapping entrepreneurs do not think linearly. They may start out that way, but those that suceed do not stay that way. This statement comes to me after thirty years of reading about successful people, including my personal hero trio: Leonardo da Vinci, Thomas Alva Edison, and Benjamin Franklin. All of them were inventors. All of them were persistent, learned what they needed to, then applied that knowledge. If they didn’t succeed, it was chalked to being an experiment, and they tried again.

I don’t know how wealthy da Vinci was or wasn’t, but he did get commissions from wealthy, powerful people. That allowed him to pay the bills and devote time to a multitude of inventions. You may not call him an entrepreneur, but he had the spirit. So did Edison and Franklin.

Bootstrappers do not think linearly

Entrepreneurs of today should never start a business without at least browsing the biographies of Edison and Franklin. That’s especially true if you want to be a bootstrapper. A bootstrapper doesn’t think “I have $100 and I’ll put it in the bank for a safe 5%.” Or even a riskier 10%. A bootstrapper has some idea they want to pursue, usual for the purity of the idea itself, not necessarily to make money. Yet they have an innate feeling that the idea will become popular, and the monetization can come afterwards.

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