Be an Ethical Entrepreneur, Marketer, and Business Builder

The best way to grow your business without venture capital or outside investments

In our current internet economy, you can flesh out the viability of almost any idea for very little money.

These are the first steps. Get customers. Get revenue. Get profit.

Bill Gates sold DOS before he owned it in the Pirates of Silicon Valley.

Bill Gates sold DOS before he owned it in the Pirates of Silicon Valley.

Your best option is to sell something you don’t have. Yet.

Bill Gates did this in the movie Pirates of Silicon Valley when he sold DOS to IBM before he bought it. Watch the movie. It was brilliant.

When I started my Performance Engine Tuning business, I got my first client and check before I invested a penny in the $2500 oscilloscope I needed to troubleshoot engine sensors.

When I started business coaching, I got my first 2 clients before I had any coaching systems in place. I quickly made them from the systems I had developed at my previous business though, and 3 years later those clients are still with me.

When I launched my internet marketing business, I received my first check to build a website before I knew how to build a website (unless you count that one I built on GeoCities in 1996).

Are you seeing a pattern here?

In all of those instances, I delivered what I promised and more, even though I had nothing to provide for my clients when they first paid me.

The only way to know if you have a good idea is to find someone to pay for it.

Get cash without giving up ownership or taking on debt.

Raise capital without losing any ownership or starting your new business by taking on debt.

If you absolutely need capital to make your idea work, probably the best option for “selling” your idea and finding customers is CrowdSource Funding with websites like KickStarter.com.

CrowdSourcing is brilliant because people give you money before you have a product.

  1. You get money
  2. You prove your idea has a customer base
  3. You retain 100% ownership and control.
  4. You even get some free marketing in the process.

KickStarter lends itself more to product-based businesses where you can provide an easily replicated product to your KickStarter investors.

In some instances you do need cash. Let’s say you have a complicated software product that is hard to “sell” without showing people it’s available.

Then do what ZenPayroll.com did and write some blogs, get some articles written about you, market on Google Adwords and Facebook ads to send people to a landing page where they can opt-in to your email list to be kept up-to-date on your products.

ZenPayroll started doing this before they had a product to sell. I signed up for their email list months ago and look forward to when they have a product that works in the 4 states I employ team members.

Building an email list isn’t nearly as good as getting money out of people, however having an email list with thousands of names on it before launching your product is a huge advantage.

Even authors know that you build your crowd first, through blogging and social media, before you write your book. That way when your book comes out you know it will sell and publishers will be lining up to work with you.

With the cheap 3d printers, you can build, test and sell prototype parts one at a time without expensive manufacturing contracts.

The bottom line is, there are dozens of inexpensive ways to get customers or very interested prospects before you have a product.

The Scaling Trap

Like all of my businesses that I mentioned above, do everything manually first, then once you know their are people willing to pay you, start systematizing, automating, and streamlining so that you can eventually scale.

NEVER scale your business before you have paying customers.

Here are a few other great options for your first business.

  • Start in an incubator. There are hundreds if not thousands of colleges around the country with incubators. These often provide cheap rent and access to professors and other entrepreneurs who can provide you with good advice. It’s also a good way to network with other startups to find new clients.
  • Buy an existing business. Five years after buying an existing business, 80% of them are still around. The reason for this is pretty simple – no one buys unprofitable small businesses. So if you’re buying a business, all you should have to do is “fix” a few things in the business to increase its profitability. If possible, buy a franchise. It’s also easier to get funding to buy an existing business with SBA 7a loans.
  • Grow the business profitably. This is the route I’ve always taken and the one promoted in Rework by Jason Fried. Only grow as fast as you can maintain profitability. This forces you to bootstrap and quickly weed out inefficiencies. The fewer inefficiencies, the more profitable you become, and the easier it is to grow in an ever improving cycle of growth.

How to raise money for your startup

Debt is not inherently bad and, when well-planned, can be very useful.
One of my first businesses was a house I bought in college to rent out rooms to save on my own rent.

For that business, I had to take on debt to buy the home.
It was a great investment and the same can be true for a lot of business debt however not all sources of capital and debt are equal.

Preferred methods of obtaining capital in order of highest to lowest preference:

  1. CrowdSourcing – You get money, retain 100% ownership, have not debt and receive free marketing.
  2. Banks – They generally charge very reasonable interest rates, you still retain 100% ownership, and they don’t tell you how to run your business.
  3. Family and Friends – Be very careful with this as you don’t want to sacrifice valued relationships and you don’t want to invite your friends and family to “dictate” what you should do with your business. Ideally you won’t need this until your 3rd-4th business once you have a proven track record of success and you’ve made most of the dumb mistakes we all inevitably make.
  4. Employee Owned – Employee-owned businesses can provide a great source of cash as well as a highly-committed team.
  5. Venture Capitalists – Once you’ve proven to have a profitable business, have worked out most inefficiencies, and are ready to scale, this can actually be a reasonable option.
  6. Go Public in an IPO – You only do this when you need 10’s or hundreds of millions of dollars. The costs to meet SEC regulations alone will run well over 6 figures annually so this has to be your last resort.

Most people get hyper-focused on one or 2 common ways to grow a business. That tunnel vision comes from a lack of understanding all of your options.

Widen your gaze to put together the best growth and funding plan for your business.

To your business-funding success, Bryan

P.S. My last blog addressed some major downsides of Venture Capital however, I disdain people who point out problems without listing any solutions. Hopefully this article provided you ideas on some better alternatives.

photo by: Tanzen80

Profits vs. Cashflow – Do you really know the difference?

In my office I have 2 young, inexperienced girls who help me. They both have wonderful personalities and great phone voices and, though they’re not perfect, they seem passionate about their jobs and eager to learn. One girl’s responsibility is to help me grow the business, the other is to help me cut expenses… At this point I’m still trying to determine if I’m better off employing people who I can train from the ground up, as The E-Myth Revisited suggests, or if I should hire the best people and pay accordingly, as many business owners suggest.

However cutting expenses isn’t as “straight-forward” as one would expect. If you had to explain and train a 19 year old with no experience on how to manage the payables, purchasing, inventory and cashflow for a business employing 13 people what would you teach them? How would you teach it?

These are the questions she needs to consider every day:

  1. How can we improve Profits?
  2. How can we improve Cashflow?

So let’s explain the difference between profits and cashflow first.

  1. Profits – Profits are an income statement or financial and tax reporting number. They don’t have a direct influence on if you can pay your bills or when. This number simply tells us if you sold more then you spent.
  2. Cashflow – This is money or cash you have available to spend. In other words, cash in the bank.

A quick example to illustrate the stark difference between profits and cashflow and why both need to be addressed is this: If I can order 100 widgets at a 10% discount and I ultimately sell all 100 widgets, then I just increased my profits 10% by cutting expenses. However if I order 100 widgets at a 10% discount and it takes me a year to sell them so I didn’t have the cash to pay the bill right away, the late charges and finance charges may out weigh the 10% discount. Or let’s say they only gave us a 3% discount, I could have put that money in a money market fund for the next year at a higher interest rate then 3% and been better off.

OK, so how do we systematize and simplify this concept? We created a spreadsheet listing all of our vendors along with the following columns with information: Vendor, Terms, Discount Terms (i.e if it’s due in 30 days but we pay the bill in 10 will we get a discount?), Late Fees, Finance Charges, Grace Period, Finance Policy.

That simple spreadsheet tells her, me, the person who replaces her if she quits, my business partner or anyone else who looks at it exactly who we need to pay and when. In other words, if cash is tight, we simply reference the spreadsheet to determine which bill we pay first and which ones we can pay late and with the “Finance Policy” we can even estimate who may credit off finance charges if we call and negotiate.

The “Terms” tell us about our cashflow options and the “Late fees”, “Finance Charges” and “Discount Terms” let us know how the vendors’ policies will affect our profits. It’s simple and straightforward, however it does take some work to collect all of this information from all of your vendors.

Keep in mind, your vendor may tell you something that experience tells you is not true. For instance, MOST billing systems where you are sent an invoice have a set term in days, however they don’t actually apply late charges until the end of the month. So you may receive an invoice on 10/25 that says Net 15. The invoice says it’s due 11/9 and that late invoices will accrue a finance charge of 1.5% per month. If you call and ask the vendor, they’ll tell you it’s due 11/9. However what that generally means is as long as you pay the bill before that company “closes their billing month” (which could vary from the 25th to the 31st of the month) you won’t be assessed any finance charges. In essence that mean the bill isn’t due until the end of the month. 🙂  In our spreadsheet we know which customers to pay exactly on the due date and which to pay before the end of the month because of the “Grace Period” field.

With QuickBooks Pro 2009
this process becomes even easier. You can setup custom terms along with applicable discounts so that when you put in the bill, Quickbooks automatically knows, and applies, your “Early Payment” discounts for the vendors who offer them. This is possible whether you receive discounts by paying exactly within 10 days from invoice date or if you just have to pay before the 10th day after the month-end in which you recieved the invoice. The custom terms in Quickbooks is quite powerful. It’s main limitation, and the reason for the spreadsheet, is you need to know the “Grace Period”, if any, as well as the “Late Charges”, “Finance Charges” and “Financial Policy”. You could probably put that information in the notes field on the vendor’s account but quickly referencing the spreadsheet seems to be easier.

In addition to the information and concepts I need to teach to my impressionable payables person, there are a few concepts that just my accountant and I need to understand. Those are the expenses I must depreciate and the goodwill I can amortize. Depreciation can either help with profits and hurt cashflow or hurt profits and help with cashflow. First off, helping or hurting your profits depends on whether you’re talking with your banker or the tax man. If you’re talking with your banker you obviously want to show lots of profit however with the tax man you want to show very little. Granted, we need to be honest, upfront, and ethical with both if we want the best for ourselves and business. Your banker will often look at EBITDA so that your non-cash expenses won’t hurt the “profits” they consider, but they’ll also look at your cashflow statement. Depreciation is usually a negative against your cashflow initially and a positive near the end of a product’s depreciable life. For instance, you may depreciate a computer over a number of years, however you need to pay for it all upfront. Since you have to pay for it immediately your cashflow is hurt. Yet, it’s now paid for so in a year the bills are all paid, but you can still take the depreciation expense on your books to minimize your profits and which helps minimize your tax burden. As a general rule, you expense everything immediately and forget about depreciation! Why? Because taking the immediate expense will help your cashflow by decreasing the taxes you’ll have to pay on your profit. There are exceptions…

Without going into a lengthy explanation of amortization, the rules are relatively the same as depreciation. The primary difference being that amortization NEVER effects cashflow. Amortization is simply an accounting number that has no bearing on your actual cash investment. I know accountants will disagree with me on this because they say it represents the difference between what you’ve bought something for and what it’s worth so your amortization deduction is equal to the cash you paid out of pocket. This is only true if you used your own money to buy the business. But why would you do that when 65% of businesses are sold with some sort of vendor financing?

For some more specific ideas on the ways your payables person should be improving cashflow check out my other blog.

To your success, Bryan

If you’d like a copy of the spreadsheet email or comment.