Bootstrappers Benefit From a Simple Financial Model

The following is a guest blog by Rick Kadet, our featured guest at tomorrow’s Bootstrapper Breakfast in Sunnyvale. Rick is a Senior CFO Consultant with The Brenner Group and works with a number of early stage entrepreneurs, many of whom are bootstrapping their startups.

As a financial guy, I worry a lot about the failure of entrepreneurs to adequately plan for unforeseen contingencies and have adequate funding to realize the potential in their firm. Regardless of whether one is bootstrapping or working off of investor dollars, the problem is the same, how to keep resources and cash in front of your business so that you can be around long enough to succeed. If you are a true bootstrapper, here are a few key issues to keep in mind.

Bootstrappers have generally raised some funding from savings or friends and family. Getting by with small funding can be a matter of balancing. Some expenditure may be needed for equipment, software, rent and communications. But bootstrappers seldom pay their employees, their most key resource. For many bootstrappers, the main difference in risk when compared with a funded company is holding their team together. When employees are not paid, there can be spouse pressure on participants to find a paying job; personal saving are depleted. How do you protect your key employee intellectual property from jumping ship? Keeping the team together is a powerful reason to raise money if you are able. The best tactical thing absent money is to keep the product development and revenue generation on schedule. This way, employees can see their accomplishments and keep the vision of the company clearly in focus. There is nothing worse than discouraged unpaid employees that are not seeing the results of their efforts or when the situation might change.

A key tool for effective cash management is the financial model that reflects the company’s actual revenue and spending plan including realistic prospects for meeting the targets set. Compare notes with other entrepreneurs or advisors who understand modeling to ensure that you haven’t overlooked a  key cash element that might affect your plan. The amount of cash needed will be influenced significantly by delays in the plan schedule, whether in completing the new product or in the time needed to bring in the revenues that will provide positive cash flow. In my experience, entrepreneurs nearly always believe (and plan) that the best possible scenario will be what happens for them. In just about every client over my nearly 13 years in working with startups, the schedule for new products will slip or customer revenues will be delayed. Spending plans laid too optimistically deplete cash that will not be there when revenues are delayed. Unrealistic forecasting (or no forecast at all) are common reasons firms run out of money.

Bootstrappers need to worry about the management of accounts receivable and customer credit. It is true that customers with their own cash flow problems may slow pay their vendors for free financing (example: GE takes six months to pay a lawyer on contract). Slow pay occurs with giant companies as well as underfinanced mom and pop business. Very dangerous are the firms that are on the brink of collapse financially but are buying on credit anyway without the vendor knowing. Regardless of size, bootstrappers need to do credit investigation and approval for their customers. Get help if you don’t know how to do credit checks. Knowing the actual payment habits of your customers will help you to have cash on hand when you need it and avoid selling to those that will not have the resources to pay.