It may be slower, less sexy, and counterintuitive, but you can be better off growing your small business by bootstrapping rather than seeking outside capital. Bootstrapping can make the business owner focus on profits and cash flow, and it frees him or her to spend time on selling and on solving problems that are keeping the company from making a profit.
Bootstrapping can also be better for employees. They work at a firm where there is a clear and absolute line of authority and they are taught a surefire way to sell a product. Also, more shares are available for them in employee stock option plans.
Overall, bootstrapping can force you to be more realistic, to not waste time and to be better prepared for the long run. After all, you're in control and accountable -- not an investor. If you follow these five rules, you should be able to bootstrap your idea and get it up and running.
1. Get Operational Quickly
One of the best things you can do to reduce risk is to begin selling immediately. Hopefully, you'll generate revenue right from the very beginning. If you can find a product or service that will sell immediately to large num¬bers of customers, you can use those sales to finance your startup, using the receivables as collateral for a loan.
In the beginning of a company's life cycle, the entrepreneur must be the chief salesperson, chief marketing officer, chief fulfillment officer, chief financial officer and the person in charge of cleaning the toilet every day. To bootstrap successfully, entrepreneurs must sacrifice their own vanity and do all of the jobs that previously had been done by a large support team.
3. Keep Growth in Check
It may seem counterintuitive, but slow, steady growth is preferable to fast, explosive growth. The second outcome usually requires a tremendous influx of capital. Growing organically is maybe not as sexy, but it's more likely to produce a company with no debt that is able to weather recessions and crises.
One option is to start a business on the side that requires your time in the morning or evening before or after your normal job. In year one, you might make $10,000 in sales. In year two, aim for $100,000 in sales and $15,000 in profit. And in year three, perhaps you'll be able to afford to pay yourself $50,000 from the $300,000 of sales. This slow-growth plan reduces your risk and makes sure that you have active health insurance the entire time.
4. Forecast from the Bottom Up
Decide in advance how much you want to make during the first year of your business. Assume for instance you want to make $50,000 in profits and that from each sale you make $1,000 profit. That means you'll need to make 50 sales during the year, or about one a week.
Forecasting from the bottom up gives you the ability to meet your sales goals and therefore to control your startup costs and growth rate. You know, for example, that for every four customers you meet, you sell one unit. This means you must meet with four customers every week. To generate four customers, you must make one hundred telephone calls to get the appointments.
Using this method, you can back into your sales and profit necessity by calculating the number of calls you must make or advertisements you must place. If making one hundred calls in a week is impossible, at least you will know and be able to work backward from that point.
5. Reconsider the Traditional Business Plan
The low-risk, bootstrapping entrepreneur doesn't need start out by writing a detailed business plan. He or she starts small, with one or two sales, slowly building with little if any debt and using his or her day job as a cushion, creating a sustainable, profitable business from day one.
Using this formula, the only person who would read your business plan is you, and you already know what the plan is. Planning is important; spending weeks writing about it is not important. Later in your career as an entrepreneur, having a formal business plan may be a good idea as you venture into larger companies and indeed want to use someone else's money to do so. But for now, that's not necessary. Spend that time selling.
More than anything, remember that the details of a business are less important than simply getting your business off the ground. Nothing matters but getting that first paying customer, and then another and another. Every sale builds on itself. In the long term, what matters is not the fancy office or title. It's the profit that you will use to pay your bills, grow the business even larger and secure the self-made future you always wanted.
Jim Beach is founder of InternationalEntrepreneurship.com and director of education at TheEntrepreneurSchool.com. David Beasley is former reporter and editor for The Atlanta Journal Constitution newspaper in Georgia. Chris Hanks is an entrepreneur and lecturer at the University of Georgia where he teaches entrepreneurship at the Terry College of Business. Beach, Beasley and Hanks are the co-authors of School for Startups: The Breakthrough Course for Guaranteeing Small Business Success in 90 Days or Less (McGraw-Hill, 2011).