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When a budding business owner starts a business, many times they do not really know what they are getting themselves in for. They may know how to be an excellent auto mechanic, painter, carpenter, CPA, Lawyer, etc., but most new business owners don't have the foggiest idea how to actually run a business. It takes a lot of time and effort in building the new business where the sales can start paying for the bills. Many business owners feel that the only way they can build their business is by borrowing money or by allowing investors put money into the venture. If you do not have a strong personal asset base or good credit rating, a bank will not lend you the money. If you do not have the management skills necessary to effectively run the company, investors typically will not put money into the company.
In any case, if you feel you have an excellent product or service and can't raise the capital, then you have to "bootstrap" your business into existence. This means that you must put your own money into the business, borrow money from friends and family, and become a very savvy negotiator! That is what this article is all about, learning special techniques that can help you survive in your business until the sales begin to cover your costs, or you are lucky enough to receive money from outside sources.
Many of our consulting projects are designed around helping the business owner make more profits. Part of this process is to help them to reduce costs in their business. Many of the traditional ways are to reduce material costs to produce a product by only buying what they need, when they need it. Also we look at how they are handling their personnel and the costs involved, including looking at how they are handling their employees overtime, and if each individual is productive or not. Then we review all of the other expenses and determine if they are overspending in these areas or not. Then we make recommendations as to ways to reduce costs, and show them how to do it. This is only good for businesses that are already in existence and operating.
But there are special techniques that can be used by many businesses to further reduce the cash outlay for needed products and services. Not all of these techniques are for everybody, but you should be able to use some of them.
Negotiate with some of your major vendors that provide you products, to set up what's called a bonded warehouse. What this means is that you have physical possession of some inventory that is owned by the vendor, and you are not invoiced for it until it leaves your warehouse. To do this you must have a good relationship with the vendor. It doesn't hurt to ask them. Also you really need to review your business and see how much inventory you really need to keep your self. Remember you possibly can "drop ship" the products to your customers directly from your vendor's warehouse.
Call your vendors and ask for longer terms on your credit. If you are typically getting 30 days terms, ask for 60 day terms. Also, another way to lower costs is to confine buying to a few vendors. Let them know that you are giving them all your business and give them some kind of assurance that you will buy from them a set amount for the coming year. This will put you in a better position to negotiate a better price and terms.
Business insurance usually is paid in advance, sometimes for a full year. Ask your agent for the name of a company that finances insurance premiums. They will either give you the name of another company or finance it themselves by changing their billing plan.
Involve employees in cost-cutting ideas. Give them a part of the savings on any ideas that they actually cut costs. For any small reduction in costs, give them a dinner with their spouse or something meaningful.
Sell part of your business equity to your key employees. This will give them more of a reason to make the business more profitable by reducing costs.
If you have any special techniques used in your business, sell the rights to this technique to similar type of companies outside your marketing area.
Whenever possible, use out side services to handle any upswings in your business. When you do not need the personnel, simply tell the service that you do not need them right now.
There is a company, Bartering Network Inc. (BNI) in Milford Connecticut that is offering up to $ 1 Million in interest and collateral-free business financing to entrepreneurs nationwide. The financing is in the form of barter dollars, which can only be used for products or services within the network. To ensure that you pay the loan, BNI sends you potential customers. They use barter dollars, which the "Money" is used to repay to loan. Interested businesses must have products or services that can be used by BNI members. You can contact them at (203) 874-8962.
Also there is another company, Tradewell in New York, that will buy your excess inventory at full wholesale prices in trade for credits to other companies that provide television, radio, and print advertising. You can contact them at (212) 888-8500.
You can buy products and services from other companies in your area by BARTERING with them for your products or services. If they do not need your products or services, simply give them a certificate they can use to buy other products and services with. If this is done correctly, you can get many of your expenses paid for in trade dollars instead of cash. There is a local trade organization, ITEX, that you can belong to, that will give you trade dollars any time you sell your products or services. These trade dollars are good for purchasing any products or services that other ITEX members have to offer. If bartering is done correctly, you can substantially lower your cash needs in paying for items you typically write a check for. With a creative mind you can pay for some of your payroll costs with barter dollars, and keep a more dedicated staff of employees.
The world of bartering is becoming a better way to do business with some of your customers and vendors. But not all your customers, remember you still have to have money to pay for payroll, rent, utilities, etc. !!
Another twist to this is working with direct mail companies, publishers of magazines or newspapers, or marketing specialists to take a piece of any income that their advertising generates, instead of paying them a set fee for the advertising. This is how Icy-Hot Got its start and they have sold millions and millions of units over the years. Now they can afford to buy advertising and not give away some of the profits!
There are many other ways in which you can enhance your business just by being creative in your thinking. Always think up ways to get the products or services you need, WITHOUT CASH!
EXAMPLES OF REAL BOOTSTRAPPING:
Andy Appelbaum and Cliff Sirlin had no cash or collateral -- but that didn't stop them from starting a successful business. In 1992, the two former attorneys launched a dry cleaning company for time-starved professionals. Every morning and evening, armed with green canvas bags, the partners would drive around upscale Manhattan neighborhoods picking up and delivering laundry.
'We were doing all the work ourselves based out of an overcrowded bedroom,' recalls Appelbaum. In 18 months, their Greenwich, Conn., company had revenues of more than $1 million. Because costs were low, profits pushed the 30 percent mark. The two men have sold four Cleaner Options franchises in neighboring communities; their target is 100 units over the next three years.
Bootstrapping techniques -- leveraging existing resources to the max -- have enabled many cash-poor businesses to get off the ground. Traditional bootstrapping techniques include negotiating extended terms from suppliers or charging 17 credit cards to the limit. But in the never-ending quest for capital, entrepreneurs are becoming more creative every day. Here is a bootstrapping battle plan to get you up and running.
* Use outside contractors. Appelbaum and Sirlin's core competency is their system of picking up and delivering dry cleaning. The actual cleaning and pressing requires expensive machinery. The two men surveyed dry cleaners and found that most operate at about 55 percent of capacity. Cleaner Options takes advantage of these underutilized facilities and pays wholesale for the services.
'Why buy machines when somebody else isn't using his?' says Sirlin. 'It's a more efficient production than we could ever have on our own.'
* Guarantee your customer base. Every business should strive to turn new customers into lifelong customers. When clients first sign up with Cleaner Options, they agree to be on a regular route, essentially committing themselves to long-term service. The sign-up system gives Cleaner Options a 90 percent customer retention rate -- a coveted figure in any industry.
* Micro-manage your inventory. Reducing your inventory costs can maximize the return on your investment. David Farthing founded Advanced Durable Medical Inc. (ADM) to rent out passive motion machines used in physical therapy. He estimated he could buy and rent at least 50 machines his first year in business.
'If I had bought all 50 at once, I would have been under in three months,' says the St. Louis-based entrepreneur. 'Since the beginning, I have bought machines only as I've needed them. That means I have no inventory, and my equipment makes money immediately.'
* Stretch payment terms with suppliers. Former beauty and fashion photographer Haim Ariav thought he could add excitement to cosmetics counters by creating multimedia presentations that explained products and features. When he and Chris-Anthony DeLellis launched Muffin-Head Productions Inc. of New York City, they needed $20,000 for proprietary programming software. Ariav negotiated 90-day payment terms.
'We sent [the software company] the purchase order, and they sent us the software overnight,' he recalls. 'We had 90 days to learn how to use it, do the job, deliver on the contract, and collect on the invoice.
'It was a gamble, but it worked,' says Ariav. 'We used to sit around and pick up the phone to make sure there was a dial tone. Now we have bank loans and lines of credit and venture capitalists calling us.' Today Muffin-Head Productions has a staff of 20, and Ariav expects sales to reach $3.5 million this year.
The author of this article is Stephen Anderson - "The Profit Doctor" - President of the St. Louis Business Alliance, a new concept in marketing business services. He can be reached at 314-936-1099 or E-mail: profitdr.ix.netcom.com.