Financing is usually the largest obstacle for a bootstrapped company. You have to be able to pay yourself and your team, as well as any vendors that you use on a monthly basis. Cash flow truly is king; it reigns over your business decisions. I’m certainly no expert, but being a CEO for 10 years has required lots of learning. This is the first post in a series designed to give you a few ideas to help you think through your financing and cash flow issues.
Aggressively Manage Salaries
As a founder you should strive to keep your salary as low as possible. You need to make enough to pay your bills, but the priority is to make sure that your team is compensated well to keep up motivation and productivity. A founder’s yearly salary does need to be high enough to avoid unwanted attention from the IRS. It’s better to take distributions from your company as money comes in as opposed to paying a higher salary.
I also recommend reviewing salaries on a yearly basis. If business isn’t as good as the year before then you should feel completely justified in lowering salaries a bit. There’s no rule that says you can’t cut salaries. The viability of the business has to come first, even at the expense of employees, though that should always be a last resort. If you’re giving a raise, make sure the raise is something that you know you’ll be able to afford for an entire year. If you want to give a $10k raise, but only feel comfortable giving a $5k raise, then you should give a $5k raise.
Work With Vendors
If you have large vendors that you need to pay each month you should work with them to find a payment schedule that works best for your cash flow situation. For example, if you have a regular monthly payment of $10k to a vendor then it would probably be easier, in terms of cash flow, to make 2 $5k payments a couple of weeks apart. If you’d rather stick with just one payment then try to schedule that payment for an optimal time of the month for you. Vendors, especially ones that take large payments, are used to working with their clients, so you should take advantage.
If the recent financial meltdown has taught us anything it’s that we should avoid debt if at all possible. I whole-heartedly believe that a business should avoid debt, but I realize that’s not always possible. I recommend against using credit cards to make small purchases. That $5 Starbucks trip should just be put on your debit card. Save the credit cards for larger purchases (if you can’t pay with debit).
What are you thoughts on small business finance? Feel free to leave any tips in the comments, as well as any suggestions for what you’d like me to talk about in the next entry in this series.