With professional services, you get what you pay for. As a lawyer, I believe that. Today, I am giving some business advice, and since I am a lawyer that does not know anything about business, you are getting what you are paying for. Take this advice at your own peril. That said, I have seen and dealt with several businesses (start-up and existing) that are in an extreme cost conservation position.
People starting businesses should, as a matter of course, spend as little money as possible to accomplish their plan until they are certain of their revenue stream. Sometimes in the course of a business, a company hits a rough path and capital preservation becomes paramount. Depending on the size, certain tactics, I believe, work better than others.
Usually bootstrapping involves a delicate balancing act. Obviously, your resources are limited in a bootstrapping phase, so you cannot spend too much. However, if you spend too little or spend on the wrong things, you throttle any chance of growth, risk serious future trouble, open yourself to liability and endanger certain key relationships. “Penny wise and pound foolish is the often cited cliché. Balancing these two conflicting values is a difficult task to manage through, but it is not impossible.1
Here are some tips for surviving the bootstrapping phase:
1. Utilize independent contractors correctly.
When you hire an employee, you have to be sure that you have enough work to keep him or her busy. Often you cannot find enough work for him or her that makes the best use of that person’s time. Independent contractors can fill the void.
2. Get a payroll service.
The obligation to pay employment taxes is a personal liability on the owner. You do not want to mess with it. The paperwork is a hassle. This is a function that should be outsourced.
3. Do not provide fringe benefits (unless they are free).
Fringe benefits are for big companies where people like security (whether real or perceived). A bootstrapping company is a lean, mean fighting machine, and the employees need to know and recognize that. If necessary to get employees, pay more. Make employees pay for health insurance. Have it available, but make everyone realize the cost. If you have to let someone go, the health coverage issue is not as huge of an issue — the employees know the precise value. Additionally, employees often find ways through spouses to get coverage elsewhere.2
4. Get a Bookkeeper.
Unless you are a CPA, a bookkeeper will save you an infinite amount of time and effort — time and effort better spent operating the business. Find a bookkeeper that understands Quickbooks and will actually come to you and do it or do it with minimum effort on your part. Find someone who will enter the transactions for you. It will cost between $200-$500 a month (and possibly more depending on the number of transactions), but this expenditure is usually the best money spent by a bootstrapping company.
5. Do not sign a lease until you are absolutely sure you are going to be there through the term.
Unless you are a retail establishment, location is a luxury. Particularly now with a glut of office, commercial and retail space, you should be able to negotiate a good lease. Get a termination provision that gets you out and clearly defines your liability; don’t sign for more of an obligation than you are absolutely certain you will use. Remember that landlords will not let you out of a lease unless it is at the end of the term or pursuant to the lease agreement. They have no legal obligation to let you out of the lease. You are in a long term contract with them; do you really need or want a long term landlord at this stage?
6. Figure out what works in marketing before spending a lot of money on operational structure.
When a new venture is starting out, estimating revenue is the most difficult aspect of planning. Often, you simply do not know. Save your money until you know precisely what works.
7. Over invest on marketing; under invest on structure.
8. Realize people giving you advice have an agenda — utilize that agenda to your advantage, but do not abuse people’s generosity.
People will be happy to give you advice; even for free. But remember that everyone has an agenda. Recognize it, deal with it, learn from them, and don’t abuse.
Of course, all of this advice should be taken with caution. Facts and circumstances may render some of these tips meaningless or wrong. However, in all of this, while we are focused on being extremely cost cautious, note that what we are talking about is how to incur the least amount of expenses. Once an expense is incurred, pay it. If you can’t pay it, tell someone you can’t pay them and why. If you can’t be honorable, don’t be in business.
Goodrich Law Firm, LLC
1 We usually see two extremes in dealing with start-ups. One is the “If you build it, they will come” Field of Dreams person (see http://www.youtube.com/watch?v=5Ay5GqJwHF8 ). This entrepreneur wants to build out everything before they come. It may work in the movies; it does not work in real life. On the other side is the entrepreneur that does everything on his own and does not hire good help. Eventually the wheels come off for him. (See Ray Liotta’s character, Henry Hill, in Goodfellas during his last day as a gangster when he eventually gets arrested because his help used their home phone.) The middle ground is where you want to be.
2 This may not be legal under the Affordable Care Act.