Like many business owners, I started my business through bootstrapping. The typical path for bootstrappers is that we use our own money to launch the business. Then as the sales roll in, we plow all the available money from customers back into the business.
Then one day we wake up and realize “we can’t keep doing business like this.”
What do I mean exactly? I’m talking about the realization that our businesses are not making the profit we want … stifling our growth potential. Often the cause is that we’ve saddled our businesses with low-profit or no-profit products, services or customers that are left over from the business’s beginning.
Time and time again I’ve seen bootstrapped-business owners who, in the early days, feel they can’t afford to turn away any business. No piece of business is too small. Because cash is king, you take business you’d rather not, all because “we need the money.”
It’s one of the downsides of self-funding a business.
Take the example of the new attorney who’s hung out his shingle, who may take cases that other attorneys don’t want or take appointed cases representing indigent defendants. It’s money coming in the door and a way to get experience – that’s how you justify it. But the pay is low compared with the effort needed, and the upside growth potential is nonexistent.
Or your company starts out selling a Web-based software product that has a free version and a low-priced upgraded version. In essence you’re practically giving everything away, in a bid to develop a loyal user base.
Or what if you’re a Web designer. You’re just 30 days in business and you leap at that $500 project, even if you end up making the equivalent of a buck-fifty an hour for your efforts. ‘It’s cash flow,’ you think, all the while performing work that you know is not profitable.
But at some point you have to start being choosy about the business you take.
The bootstrapped business won’t ever graduate to the next level of growth if all your time and resources are tied up on barely profitable or – gasp! – unprofitable business. The company slowly strangles itself.
The answer to this is, first and foremost, having good detailed numbers. There’s real value in tracking profits down to the individual product, service and/or customer level.
Large companies typically have good financials that show product line P&Ls. That data helps management understand exactly how much profit the company is making from each business line or customer. From there managers can make informed choices:
- Do we raise prices on certain product lines?
- Do we try to drive out costs of certain services – or discontinue providing them?
- Do we “fire” certain customers?
What surprises me is how many small business managers have only the vaguest sense which product lines or customers are profitable and which are not – and no real data. Sure it may take some effort to set up your accounting to track detail accurately at the product, service and/or customer level. It’s easier to do this in some businesses than in others. But using today’s accounting software and the help of a good controller, bookkeeper or outside CPA, it’s doable.
At some point, one of the most important moves a bootstrapped business can make is to start being choosy. Unless you have an overriding reason to deliberately continue with a low-profit offering (such as using it for a loss-leader to attract higher value business), then weed it out.