Bootstrapping is the term used to describe the process of starting a business with no outside funding. Many famous entrepreneurs bootstrapped their now well known businesses when they were first launched including Bill Gates (Microsoft), Michael Dell (Dell Computers), Pierre Omidyar (eBay), Paul Simon (YDE) and Richard Branson (Virgin) to name just a few. These entrepreneurs used a combination of different tactics to get their businesses off the ground without outside capital.
Here are some of the tactics you can use to get your new business off the ground with little or no outside funding.
1. Break the Golden Handcuffs
Many talented individuals who have a desire to start a business are scared of not meeting the car repayments on the BMW, not paying into the pension fund and not meeting the repayments on the holiday house. The reality is that starting a business takes sacrifice. Unless you are willing to make a sacrifice, entrepreneurship is not for you. If you do want to launch a business in the future, set a deadline for when you wish to start and begin cutting back now. Learn to live on less and put money aside so that you have some of your own funds when you do break away.
2. Back Yourself
The greatest believer in your business idea is you. If you are not willing to put a large chunk of your own money into the business and make the necessary financial sacrifices to get the business off the ground then no one else will be willing to back you. Once you have put your own resources into the business, your most likely source of support is the people closest to you. They know you, trust you and want to see you succeed. Paul Simon, in launching the first YDE store in a back alley shop in the centre of Cape Town, borrowed R10 000 from his mother’s retirement policy to get the concept off the ground. He never borrowed money again nor did he take on any outside investors until he sold the store 10 years later to Truworths for an undisclosed sum in excess of R200 million.
True entrepreneurs become jacks-of-all-trades in the start-up phase of their businesses. There have been accountants who became designers, engineers, copywriters, marketers, programmers and salespeople. There is no such thing as sticking to your specialty and only doing what you are trained for if you are launching your own venture. The more you do, the less you need to pay someone else to do so teach yourself to engage with new activities and tasks so that you can get your business off the ground. When you are making millions, then you can hire an accountant, outsource the design, engage a PR firm and get a freelance copywriter in but until then you and your management team will need to train yourselves to fill many of these roles.
4. Work in Parallel
Selling your time or delivering a service usually costs very little and translates into quick cash. Therefore, it is sensible in the early stages of a business to do some sort of consulting work while you are building the business and its products. Selling time means that you can have income in month one and you can use that income to acquire what is required to get the rest of the business off the ground.
5. Keep the End in Mind
Consulting is a good way to generate cash flow in the start-up phase of a business. The risk is that the entrepreneurs become too dependant on consulting or too greedy. They sell more consulting time without ever developing the product that can be sold independently of the consulting work. They then get caught in the cycle of just doing more and more consulting work and the business becomes totally dependant on them selling time. Selling time means hard work for the entrepreneur and fewer opportunities to sell the business in the long-term. If you do opt to consult to generate cash flow, always try to work towards productising your offering so that you don’t need to be present to deliver your offering. This means that you can be on holiday and still earning money or your business will be far more attractive to a buyer because they get a viable product that they can take over and sell.
6. Get Going
Too many entrepreneurs want to raise hundreds of thousands of rands before they have done anything. While your business is still a concept that only exists on paper it is unlikely that anyone will take notice. The reason that Facebook was able to raise $25 million in venture capital was that Mark Zuckerberg had already built his first version of the Facebook platform and had already attracted users. It worked the same way for Sergy Brin and Larry Page of Google. They put up a test site on Stanford University computers and asked their friends to try it out before they had any investor interest in their multibillion dollar search algorithm. If you want to get people interested in what you are doing, start doing it, build something tangible that they can see, try and experience in order to get them to buy in.
Be careful of analysis paralysis. Many people spend so much time planning that they never actually get into business. MBAs and CAs are notorious for overanalysing an opportunity. Often they build so many models, do so many excel spreadsheets and engage in so much discussion that they never actually get to the market. This leads to nothing. There comes a time in the process of building a business when one needs to draw a line in the sand, decide it is worth doing and just start building the product or delivering the service.
7. Ship then Test
Many people want their product or service to be absolutely perfect before they ship. Microsoft has never done this. They ship their software before it is perfect and adjust and update along the way. Certain products or services don’t need to be perfect before you ship. Quality assurance processes are critical for other products. If MSN messenger does not work absolutely perfectly, it can quickly and easily be fixed and no one will die. If Boeing ship a product before it has been perfectly refined and tested, the ramifications may be far more serious. Ask yourself: “Would I let my mother or father use the product or service in its current state?” If the answer is yes, ship it.
8. Sell (upfront)
If the product or offering that you are creating in your new business is appealing enough, you may be able to make some sales before the product is produced. The money that comes from these sales can be used as a form of capital in the development of the product. Anyone with a compelling enough product and some innovative selling skills can sell their product or service – even before it is developed – and use that cash to develop the product or service.
Dell computers allow users to create their own PC via their website; they then get customers to pay for their PC before they even start building it. After receiving the payment they begin building the computer and ship it to the customers 10 days later. This gives the company massive cash flow advantages and enables them to hold minimum or no finished goods inventory. How could you sell your goods or services and collect the cash before you have even begun to build the product or deliver the service?
In launching a new business, you will almost always make use of suppliers. Your suppliers are the people giving you a product or a service. If you are retailing coffee, your suppliers are the people giving you coffee beans and mugs. If you are starting a website, they may be providing you with server space. It is very useful to try to negotiate payment terms with suppliers who allow you to pay them 30 or 60 days after they have delivered the product or service to you. This is not always easy but you may be able to convince them by being a tough negotiator or by offering them something in return for favourable payment terms.
As you grow as a business and your negotiating power with suppliers increases, this becomes a more realistic option. Pick n Pay is brilliant at it. They get suppliers to supply stock, they then sell that stock to customers four to six days later (on average), customers pay in cash as they buy the goods and Pick n Pay pays the supplier 90 to 100 days later. This means that they have the suppliers’ money for 90 days before paying it over.
As a smaller business you may need to incentivise suppliers to give you extended credit terms. Such incentivisation can come in many forms: One online marketing company gave their client a free monthly campaign in return for favourable credit terms while other companies sometimes select their suppliers on the basis of their credit policy.
Swapping and sharing are two of the most logical yet overlooked tactics for bootstrapping. It makes no sense for a start-up business to buy its own printer or delivery vehicle or rent its own boardroom or manufacturing facility. Clever bootstrappers will link up with other small businesses and share resources, thereby minimising the outlay and maintenance cost for those resources.
Bartering is the oldest way of doing business. People have bartered for years, swapping their wares and services for the wares and services of others. This is one of the most powerful tools for anyone looking to launch a business on a really small budget. Offering your product or service to another business in exchange for something that you need creates a real win-win relationship for both parties. You land up getting what you need to start your business at a lower ‘cost’ than normal and more importantly for a zero cash outlay and the other party gets something they need for much lower than the market price.
Craft a verbal proposal for suppliers, offering them something of value in exchange for something they have that you require to manage or launch your business.
The most critical thing that you can do in bootstrapping your business is to manage for cash flow and not for profits. Over 70% of the start-up businesses that fail are profitable. They don’t fail because they are not making profits; they fail because they run out of cash. They don’t have anything left in the bank account to pay suppliers, employees or other creditors and therefore need to file for bankruptcy. Cash is the short-term economic driver of a business, so do everything you can to keep your cash balance in the black.
Starting your business with mounds of capital can make your business fat, lazy and unresponsive. Starting your business with minimal capital will make you lean, responsive and focused on meeting the needs of customers. To unleash your true creativity in starting a business, launch the business without outside capital. This will force you to put the foundations in place for a business that can last long into the future.
Tips For Successful Bootstrapping
Here are a few tips to help you launch a successful business through bootstrapping.
1. Forecast from the bottom up
Most entrepreneurs forecast top-down: “If 1% of South African car owners install our satellite radio systems, that’s 94 000 systems.” The bottom-up forecast: “We can open 10 facilities that each install 10 systems a day.” Guess which forecast is more likely to happen?
2. Forget the “proven” team
They’re overrated. Hire young, inexpensive, hungry people with fast chips, but not necessarily a fully functional instruction set.
3. Focus on function, not form
Bootstrappers focus on function: computing, getting from Point A to Point B and knowing the time of day. All the chair has to do is hold your butt. It doesn’t have to look like it belongs in the Museum of Modern Art.
4. Under staff
Many entrepreneurs staff up for what could happen, best case. Bootstrappers under staff, knowing that all hell might break loose.
5. Go direct
The optimal number of mouths between a bootstrapper and her customer is zero. Sure, stores provide great customer reach and wholesalers provide distribution. But e-commerce was invented so you could sell direct and reap greater margins.
6. Position against the leader
Toyota introduced Lexus, claiming it’s as good as a Mercedes-Benz but half the price – Toyota didn’t have to explain what “good as a Mercedes-Benz” meant. How much do you think they saved? Find out how deep the rabbit-hole really is. The equation is simple: amount of cash divided by cash burned per month.
- Guy Kawasaki – How to Change the World: http://blog.guykawasaki.com
- Bootstrapping Blog: http://www.bootstrappingblog.com
- Bootstrap Austin Blog: http://blog.bootstrapaustin.org/
- Bootstrapping 101 Blog: http://bootstrapping101.wordpress.com/
- Bootstrapping Without Boots: http://blog.bootstrappingwithoutboots.com/
Understanding Your Responsibility As An Employer
Now that you have your own employees, here is what you should know about your new responsibilities.
Hiring employees requires more work from you as the employer than simply placing a job ad, hiring the right person and training them on their role.
You need to be aware of the Labour Law requirements in terms of the various funds and other stipulated registrations.
Related: 5 Factors That Make a Great Boss
The law does not differentiate between different size organisations, and therefore it is imperative that SME’s fully understand the implications of all aspects of Labour legislation.
How To Write A Business Plan
A useful guide on how to write a business plan.
An international study showed that only 42% of small-business owners actually took the time to write a formal business plan, but of those who did, more than 69% said it contributed greatly to their success.
It’s no surprise that most experts and financial institutions advise those thinking of starting their own business to put together a comprehensive business plan first.
Related: Business Plan Format Guide
But before you put pen to paper, there are a few vital exercises you need to go through to ensure your business idea is a viable one.
Step 1: Research
The business you plan to start might be in an industry you have some experience in or it might be totally new to you, either way you need to do in-depth research into the industry and market to make sure you fully understand how it operates.
Your research should include:
- Understanding the dynamics and forces affecting the industry
- The preferences and characteristics of your target market
- Insight into how many competitors are already operating and the quality of their product or service
- Finding out who you could partner with to start the business
- How your product or service will be created and delivered
- How it is different from those that already exist, and identifying a profit and operating model for the business.
Some of the sources you can turn to for this information include:
- The Internet
- Industry experts and associations
- Suppliers who play a key role in the industry
- Existing competitors in the industry
- Interaction with member of your team.
Step 2: Stress-test your business concept
Many people are infatuated with their new business idea before they have properly evaluated whether it is worth the time and money they need to invest in it.
FREE Business Plan Template Download
An idea should be stress-tested before producing and selling it.
- Technical feasibility: When considering the technical feasibility you need to know if the technology for your product or service is available or still in development, what possibilities are there that the end user might not want to use your technology and what other technologies could becoming competition in future.
- Market feasibility: The market feasibility refers to the actual need for what you are selling, how large is the market and how fast it is growing. You need to know who your customer is, what their needs are and the advantages and disadvantages of your product or service over the competition.
- Financial feasibility: You also need to determine the financial feasibility by determining what the sources of revenue for the business are, what the major costs are for the new business, is there a good profit margin, what capital is required to launch the business, how long the business will take to break-even and you should develop best-case and worst-case scenarios regarding your cash flow. If you are using your business plan to apply for funding, the funder will also want to see that your cash flow will adequately cover your running expenses and enable you to re-pay their loan.
- Team feasibility: When looking at the team skills you will require to get your business off the ground, you should identify how many people it will take to make your business happen, what cost they will come at and develop a timeline for staffing if your budget does not enable you to hire staff immediately. If you intend to run the business by yourself then determine the skills and expertise you will require (marketing, sales, financial, etc). If you are not equipped with these skills, you should consider bringing a partner on board, outsourcing and/or up-skilling yourself.
Step 3: Refine your business concept
Based on the findings from your research and once you have stress-tested your idea, you may have identified weaknesses or opportunities.
The findings will allow you to refine the business idea so that it fills any gaps in the industry, meets market demands, is different from competitor offerings, leverages relationships with partners and suppliers and is financially sustainable.
Step 4: Writing the business plan
While a business plan doesn’t automatically guarantee success, it does assist an entrepreneur to avoid many of the common causes of business failure, including undercapitalisation or an inadequate market-share.
Related: Sample Business Plans
While there is no universal business plan template, plans generally include the following sections:
1. Table of Contents
This features the main headings of the business plan and their page numbers for easy reference. Finalise this section last to ensure the numbers are all correct.
2. Executive Summary
The executive summary is a summary of your full business plan. It contains the summary highlights of each section of your.
It should also describe the company, provide details about management and their strengths, the business objectives and why it will be successful, and if the business needs external funding, how much is needed, and how it will be repaid.
The executive summary is written last and should not exceed two pages in length.
3. General Company Description
This is where you give an overview of the company and the business it engages in.
It should include the company’s name, mission statement, goals and objectives, and strengths.
If you have a register company name, trademarks, patents, BEE credentials and/or a VAT number include those details here.
4. The Opportunity Industry & Market
Based on the research you conducted prior to writing the business plan, you will discuss the opportunity you have identified, the ‘gap’ that exists in the market. You’ll need to detail why this gap exists, how you identified it and how you will fill it.
When writing about the industry you must answer questions about:
- The ‘barriers to entry’ (how easy or difficult it is for future competitors to enter the same market and offer the same product or service as you do)
- Who the customers are and the influence they have over prices
- Who the suppliers are and their influence over the prices
- Who the competitors are and how strong their products or services are and the major changes affecting the industry.
Regarding the market you need to state the total size of the market, what percentage of the market share you will have, and major trends.
5. Business Model
The business model you choose will be a strong determining point of the future the success of your business.
Your business model must include information on what your companies offers in terms of products or services; what makes your offering unique; who you sell them to; and how you make your money.
You need to take into consideration the source of revenue, the major costs incurred in generating revenue, the profitability of the business, the investment required to get the business up and running and the critical success factors for the model to work.
Discuss how your business will compete in its specific market.
You need to explain the strategic choices you have made including the focus of the business, how you will create a unique and valuable proposition, what is unique about your business and what value there is for customers.
You must also include your plan for how you intend to enter the market and grow your market-share.
7. Team: Management & Organisation
You will provide a breakdown of the people in the business. It should include a list of founders including their qualifications and experience, a description of who will manage the business, and an organisational chart if you have over 10 employees.
8. Marketing Plan
This should provide details on your marketing strategy based on your market research.
The marketing plan should include important marketing decisions about the product or service and the value thereof, a detailed description of the target market, the product or service’s positioning, the pricing strategy, the sales and distribution channels and the promotion strategy.
9. Operational Plan
An explanation of the day-to-day operation of your business. It should include the business’s operating cycle, where the skills and materials will be sourced from, if anything is to be outsourced and how you will manage those relationships, and the cash payment cycle.
10. Financial Plan
The financial plan is an overview of your business’s financial future. You should back up the main features of the financial plan with accurate financial projections.
The most important information to include in this section includes start-up expenses and capitalisation, a 12-month profit and loss projection, a 12-month cash-flow projection, a projected balance sheet at start-up and the end of years one and three and a break-even calculation.
This section contains any supporting documentation you think the reader would want to refer to and could include:
- Brochures and advertising
- Industry studies
- Blueprints and plans
- Maps and photos of locations
- Lists of equipment
- Letters of support from future customers
- Market research studies
- Detailed financial calculations and projections.
- Business plans vary from one organisation to the next as well as the reason for the business plan. If you are writing the business plan to submit to a bank or other institution for funding you should contact the institution beforehand to find out what their specific requirements are for business plans. If you aren’t looking for funding your plan will look different and there should be a focus on cash flow.
- If you are using your business plan as a tool to attract funders, partners or suppliers, the executive summary is the section that will be viewed first. The contents of the summary therefore must make a good impression and clearly demonstrate opportunity and viability.
- Some entrepreneurs are concerned that those who read it could steal their ideas presented in the business plan. While some experts say this really isn’t something to worry about since it is the execution of an idea that is most important, if you believe your plan contains proprietary intellectual property, you should take steps to protect your ideas by registering trademarks and/or patents.
- Using visuals like graphs, tables, diagrams and photos will capture readers’ attention. If you are communicating technical or complex ideas use a graph, table or diagram to increase the likelihood that the information will be read and understood.
- If you are presenting your business plan to third parties, ensure have corrected all spelling and grammatical errors. It is a good idea to give it to someone with strong language skills to edit it for you. Spelling mistakes make a bad impression.
- There are many people who offer to write business plans on your behalf. This is not the best route to take as the process of putting the plan together will identify areas that need further research and help you determine the viability of the idea. It will help you know your business inside out, which is especially essential when presenting to potential investors.
- If you don’t have a strong financial background, you can get assistance from someone who has, but be sure to let them explain the different aspects of your business’s financials. They will help you by pointing out key areas like payment terms and cycles, cash flow and any other discrepancies in your plan.
- One of the most common mistakes people make is in creating unrealistic and over-optimistic projections. You must spend enough time collecting relevant and realistic figures for your financials. As a rule of thumb, experts recommend that start-ups halve their revenue projects and double their expenses.
- Don’t make the business plan too long. In general it shouldn’t exceed 25 pages as this puts people off reading it. If you have more than 25 pages, cut out unnecessary information and include it in the appendix.
Zoning and Permits
If you are thinking about setting up a business in a residential area you will need to know about zoning.
Have you considered the legal ins and outs of starting a business in a residential area? You will need to know about zoning.
The Home Office
You want to open a simple consultancy, for example. You start out on your own, as so many entrepreneurs do, at home in your spare room. No inconvenient trading licences to worry about. As you take on some support staff, you hire your first few square meters of office space. Times are good and suddenly your new business is legit and firing on all cylinders.
Clients are happy, word of mouth has taken care of your marketing and you’ve had to take on more staff to cope with the increased workload.
All of a sudden you no longer fit into the modest office space you hired for your fledgling business and you have to think about expanding. But you’ve been paying rent for over two years and it seems such a waste. And now that you think of it, you were considering selling your substantial home and moving into a lock-up-and-go townhouse.
It occurs to you that perhaps you should keep the house (it’s an asset after all) and convert it into business premises. That way you’ll save on rent.
On the surface it all seems to make perfectly good business sense. Except for one thing. Your house is in a residential area and therefore not zoned for business purposes. In order to trade as a business on those premises, you will have to apply for the property to be rezoned – and the time and energy needed to achieve that may make another year’s worth of paying rent not seem so onerous after all.
If you are operating a one-person business, don’t employ staff and don’t have clients calling regularly at your premises, you don’t have to apply for business rezoning. But if you need to put up signage, expect clients, suppliers and staff, and if the property is used solely for business purposes then, in all likelihood, you’re in for a rezoning application.
If you are searching for a business premises, here is what you need to know about leases and landlords.
The Rezoning Battle
But here’s the catch – applying for a property to be rezoned as a business in no way means that it will automatically happen. As South African cities boom with business growth and congestion becomes an ever-increasing cause of frustration and wasted time, businesses are moving out of the CBD and into what were previously residential areas.
This is a natural phenomenon of urban geography and over time, as residents realise the potential value of selling up their homes to businesses that want to move in, areas are rezoned for business. However, if an area is not yet zoned for business, the residents usually have fairly strong objections to it becoming so.
Businesses generate traffic and parking problems. Local councils typically take the concerns of residents seriously and are reluctant to rezone an area for business on the strength of one application.
Add this to the fact that every local authority has a different set of parameters which guides rezoning decisions – and that each application is taken on its individual merits – and the process becomes extremely complicated.
Ultimately, if you want to avoid the daily horrors of traffic and purchase your own business premises in a residential neighbourhood, your best bet is to set up shop in an area in which other businesses are already established. After all, there is strength in numbers and this greatly improves your chances of getting the area rezoned.
Related: Register A Company In South Africa
To apply for rezoning in an area that is not zoned for business, you have to secure a zoning scheme departure or special consent from the City Council. Getting this can take a while – in some cases up to three months. You may need to advertise your business’s intention to conduct a particular business activity in the local newspapers.
Residents and other stakeholders will have the chance to respond with any complaints, which are heard by a board, before you will be granted or denied the departure. Being granted a departure usually paves the way for successful zoning approval but, once again, there are no guarantees. And all the while, you can’t operate legally as a business in that particular area.
When it comes to the legal side of setting up a business, it pays to do your homework and get professional assistance where appropriate. The cost of mistakes and bad judgement calls in this area can be severe.
Trading licences are governed by the Business Act of 1991, No. 71, which states that certain businesses require licences. These include:
- Those that sell or supply meals or perishable foodstuffs
- Those that provide certain types of health facilities or entertainment. These are defined as Turkish baths, saunas or other health baths; massage or infrared treatment; escort services (male and female); games halls that have coin- or token-operated mechanical or electrical devices or three or more snooker or billiard tables; night clubs and discothèques; cinemas and theatres, and “adult premises” as referred to in section 24 of the Films and Publications Act, 1996
- Those that hawk meals or perishable foodstuffs
Before you open your doors, you had better check whether your business needs a special permit or licence. Certain types of businesses, namely those that sell, hawk or supply meals or perishable foodstuffs and those that provide certain types of health facilities or entertainment, require a licence to trade. In addition, purveyors of liquor need to apply for a liquor licence.
To obtain a trading licence for your business, you need to apply to the Licensing Department, which in turn requires reports from the health and fire department and town planning. The latter two departments will check that your business meets health and fire regulations and that your proposed premises are in an area zoned for business.
- Provincial and Local Government directory
- South Africa Government Services: Permits, Licences and Rights
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