Bootstrapping is a good strategy.
"Bootstrapping isn't a limitation; it's an opportunity. It forces you to prioritize, make tough decisions, and focus on what truly matters for your business." - Rand Fishkin
Every individual or company is in business to make money, but an entrepreneur shouldn't only be good at making money, he/she must also be excellent at managing money. If like me you are not a financial buff and prefer to focus on the more creative side of doing business, it would be good to take a course to learn at least the basics and definitely hire a good accountant and tax advisor.
Start by defining your short-term and long-term goals. This will help you determine the financial resources you need and the timeline for achieving them. Before starting your business, you will need to make a realistic forecast of your personal financial needs. A personal budget is a plan detailing the personal living expenses you will need to fund from the business or other sources. It should set limits to the amount you plan to spend each month on items like rent, food and housekeeping.
In this post we will take a closer look at the critical aspects of finance planning that you will need to consider in order to build a profitable and sustainable business:
Start-up funding options
Financial projections and forecasts
Risk Analysis and contingency
Accounting software and tools
#1 Start-Up funding options
It may take several months before a new business is profitable and generates a cash surplus. You may need alternative sources of income during this period, if only to cover your outgoings. If your business makes a profit, you may want to re-invest it to help it develop.
Other ways to fund your business could be to use your personal savings if you have enough to invest and still have a surplus to fall back on. While this will give you complete control, it may not be the best option as you may need your savings for emergencies.
Bootstrapping means you leverage your existing resources to minimize expenses. For example, utilize free or affordable software tools instead of investing in expensive enterprise solutions. Maximize your skills and capabilities rather than hiring additional personnel. Prioritize spending and focus on activities that directly contribute to your business growth and revenue generation. Cut unnecessary expenses and invest in areas that provide the highest return on investment. Seek cost-saving opportunities and look for ways to reduce costs without compromising the quality of your products or services. Negotiate with vendors, explore cost-effective marketing channels, and consider outsourcing non-core activities to freelancers or contractors. Most bootstrapped startups grow slowly but also more sustainably with an average growth rate of 20% per year according to research from the Kauffman foundation and this is an increasingly popular approach with entrepreneurs.
You could retain your existing job to sustain your personal cash flow. You could look at selling, trading, leasing or transferring unwanted or non-essential assets. Taking a loan from family and friends at low-interest rates, seeking funding through a financial institution or using your gains from stock market investments could be other alternatives.
You could also go down the route of angel investment, venture capital, crowdfunding or government funding, depending on the nature of your business. Each of these options come with their own set of complexities and challenges so you should research and explore the pros and cons of all possible financing options before choosing a path that suits you.
#2 Financial projections and forecasts
Your forecasts should run for the next three to five years, and their level of sophistication should reflect the nature and complexity of your business. However, the first 12 months' forecasts should have the most detail associated with them. Include the assumptions behind your projection with your figures, both in terms of costs and revenues, so investors or relevant stakeholders can clearly see the thinking behind the numbers.
1. Capital and operations cost forecast
Be realistic about how much money you need to get your business off the ground and factor in a range of start-up costs such as (but not limited to):
Business registration fees
Solicitor or accountant fees
A marketing budget, including your website/logo/social media promotion etc
Premises and business assets
Business insurance
Inventory and stock supplies
Existing and future staff salaries if applicable
Equipment, e.g., computers, office furniture
Software and online tools
Research and Production costs
While this is not an exhaustive list, it gives an indication of the sort of costs you could be considering in your operations forecast.
2. Sales forecast
New businesses must make assumptions based on market research and realistic judgement. The factors to consider are market growth, your own resources, overcoming barriers to entry and the strength of your product or service offering. You could begin by listing the number of customers you think is realistic to achieve in your first year. Then try to assign a realistic sales figure against each of them. It all depends on your type of business, and there will inevitably be some guesswork here, but try to be realistic without being too conservative.
3. Cashflow forecast
Cashflow forecasting enables you to predict peaks and troughs in your cash balance. It helps you plan how much and when to borrow and how much available cash you're likely to have at a given time. Many banks require cash flow forecasts before considering a loan. The cash flow forecast identifies the sources and amount of cash coming into your business and the amount of money going out (including what you spend it on) over a given period. There usually are two columns: listing forecast and actual amounts, respectively. Cashflow statements should show your cash balance and monthly cashflow patterns for at least the first 12 to 18 months.
4. Profit and loss forecast
Profit and loss forecast is a statement of the trading position of the business: the level of profit you expect to make, given your projected sales and the costs of providing goods and services and your overheads.
#3 Risk analysis and contingency
Alongside your financial forecasts, it is good practice to review the risks your business could face and consider the mitigations/insurance to cover these. Risks can include:
Strategic risk, for example, a competitor coming on to the market
Compliance and regulatory risk - e.g. introduction of new rules or legislation
Financial risks like interest rate rise on your business loan or a non-paying customer
Operational risk such as equipment breakdown or theft of essential equipment
Environmental risks, such as natural disasters
Political and economic instability in any foreign markets you export goods to
Health and safety risks
Commercial risks, including the failure of staff, key suppliers or customers
Workforce risks, e.g. maintaining sufficient staff numbers and cover, employee safety and up-to-date skills.
Set aside some funds as a financial buffer to deal with unexpected expenses or downturns. Having a contingency plan can help you navigate uncertainties and avoid unnecessary financial strain.
#4 Accounting software and tools
Small business owners benefit from accounting software because it helps them track accounts receivable and accounts payable, have a clear understanding of their profitability, and be prepared for tax season.
In the world of accounting software, a small business can use out-of-the-box software without requiring extensive customizations. However, as a business grows, its accounting needs become more complex, and a custom enterprise resource planning (ERP) system is often needed.
There are many different types of accounting software available for small businesses, with varying capabilities and price tags. Some web builder platforms offer a basic range of accounting functionality, payment methods and dashboards that help you analyze your sales funnels as well as marketing effectiveness. These are adequate to start off with depending on your business model. When choosing a platform don’t forget to check what functionality it delivers from an accounting perspective.
Generally, the type of industry and number of employees are two factors that can help a small business owner begin to choose the appropriate accounting software. For example, a freelancer would not need the same features as a restaurant owner when using accounting software.
Planning finances especially for a bootstrapped startup requires careful consideration and strategic decision-making. It requires discipline, creativity, and a willingness to adapt. Stay focused on your goals, track your expenses diligently, and make informed financial decisions to ensure the sustainability and growth of your business.
If you've found this post useful, please leave your questions, comments, share insights from your own experience, or perhaps different points of view. Follow me on LinkedIn, Facebook, Instagram, Twitter and Medium where I will be sharing more practical tips and content like this as well as strategy blueprints for business, brand, product and marketing. I’d love to have your feedback. Join the conversation and share this with your network - knowledge shared is power multiplied.
If you are an aspiring solopreneur or an entrepreneur and need strategic business and brand advice or even an intrapreneur who wants to catalyze change within your organization, visit www.brandcrib.com and join the community. Alternatively email me on georgette.kolkman@brandcrib.com. I’d be happy to help.
Wishing you success, prosperity, personal growth and positive change.
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