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.


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