The following is a case study on a young entrepreneur who started a dot com –we’ll call him Dan. Dan secured $250,000 in funding from friends and went to work. Within one year he was out of business, a quarter of a million buck, gone. His idea was fine. Not remarkable, not awful. What sucked was his model.
Your business will live and die by cash flow, pure and simple. If you are NEVER in a cash flow negative position, you can never go out of business. You might shut your doors because you decided that the level of success you experience is not worth your while, but no one will shut you down. And that is the goal of a bullet-proof business, to be able to last long enough to succeed. If you design your business to NEVER be cash flow negative, you can go months without revenue and survive. Dan had a fine idea and according to the wisdom of the day, was doing all the right things, but his business never lived long enough to build the momentum required to succeed.
So, if you’d like to build a business that can never go under, follow these simple steps:
Dump the Debt. We often hear about successful businesses that were started out of the trunk of a car and funded by the guy’s credit cards. If you want to truly have a bullet-proof business, ditch the cards and ditch any debt that will work against your cash flow. The only exception to this is for purchases of capital equipment that will allow you to meet existing demand that you currently cannot meet.
Sorry, we’re not hiring. Dan wasted no time in hiring two friends, one for sales, the other for “product development” (designing website templates). The problem is that NEITHER of these positions required staff! Craig’s List is CRAWLING with awesome artists looking to build their resumes who will do the work for far less than it’s worth. And sales guys, provided your incentives are structured properly, will LINE UP to pitch your product. Go online and set them up as independent contractors.
So lesson number two is DON’T HIRE if you can possibly help it! 1099 every single person you can! Redefine positions to make them contract-able! There are laws regarding what types of jobs can be contracted, so talk to an CPA and your attorney about the positions you’re looking to hire and have them help you find ways to make your company run without employees. The moment your revenue dips, you’ll think those legal fees were the best money you ever spent.
Salaries are for suckers. When Dan brought on his team, he provided each with solid, family-supporting salaries. With $15,000 to cover every month just in payroll, and no revenue, he was burning through his cash at an incredible rate! If he had adopted a pay-for-production model, he only would have paid for the results that benefited his company. Pay every position possible on a production basis. Pay sales guys for contracts, pay developers on a per job basis. If you’re in manufacturing, see if you can pay based on output. If you only pay when something is produced, you never go in the red. It’s that simple. When they produce, then you pay. When there is nothing to produce, you have nothing to pay. With payroll being the single greatest expense of most businesses, the more you can directly tie it to output, the better off you’ll be. In the first three years of your company, there will be countless times when this will save you.
Don’t rent an office… especially if you’re in tech! Unless you have a real, current need for an enormous server in a climate controlled environment and you absolutely CAN NOT outsource it, start your business in your garage. And then keep it in your garage. Forever. You’d be shocked to see how many entrepreneurs used their three car garage in their parent’s home when they started their first company. Put your administrator to work in the downstairs bedroom.
Now, you may not have access to your parent’s three-car garage, but then again, your business probably isn’t industrial. If you work in tech, there is almost no conceivable reason to ever work from anywhere but your home (And it’s freaking convenient!).
This was the other colossal mistake Dan made. He rented a $3000/month space in an industrial park for WEB DEVELOPMENT! And he had a HUGE spare room in his house sitting empty! Between rent and payroll he was running behind to the tune of $18,000 per month. Is it any wonder this guy folded in a year?
The bottom line is that if your income is greater than your expenses, you can stay in business. Even if it means living on $500 per month for the first four years of your business, if you’ve got the strength to keep pushing forward, you can. No one’s evicting you. No one’s repossessing your capital equipment. And that makes you bullet proof.
Nathan Lindley is a business author, public speaker and serial entrepreneur, cofounder and CEO of Good Book Publishing, helping seniors ghostwrite and publish their memoirs. Follow him on twitter at @NathanLindley.
Category: Startup Advice