Bootstrap Boogie

In honor of Leap Day, we’re featuring a local entrepreneur who took the leap, pursued his passion and started his own business.

Guest Blog by Mike Dragosavich, CEO of Spotlight Media

If there was a song called “Bootstrap Boogie”, I would have been line dancing to it for the last six years.

Definition of a Bootstrap Entrepreneur:

adjective

(of a person or project) using one’s own resources rather than external help.

The fact that I started a company with little capital was both the most frustrating and fulfilling situation that I could have ever imagined. I am extremely happy I decided to take that path in business and, while I know this might not be the best path for every business, it was important for me personally and for my business model.

With no money to operate outside of paying essential bills, my focus was always on finding ways to execute and grow without investing financially. The one resource I had on my side was time. I was willing to work 16 hour days and seven days a week. I think, if this wasn’t the case, there is no way I would still be in business. As I was getting kicked out of coffee shops at closing time because they were the only source of Internet I had, I found many ways to execute daily tasks and tactics for minimal cost.

Here are some alternatives I found.

  1. Free alternatives: Instead of using a software design program to design the magazines, I found free alternatives that offered design solutions but maybe not for print. I improvised with their tools and created a workflow that I needed to design print magazines. The software I used was wix.com, which is intended for website design. I used it to design a magazine. I’m pretty sure out of the millions who have used Wix, no one used it like me!
  2. Favors: In my free time I learned how to develop WordPress blogs and websites by watching tutorials on the web. I needed a website for my company so this was a way to save money. But, I figured I could use some of my free time to develop websites as a favor to some established business owners that allowed me to gain some great relationships. Some of these business owners became mentors to me. I did not expect anything in return but maybe advice and support in any way to my mission of providing a magazine with resources to the community.
  3. Reports: A situation I am in now is that I have come to a point in business where I rely heavily on spreadsheets. Unfortunately I never took the path in the past that promoted education in Excel or other spreadsheets.  With knowing that my future as a CEO will rely heavily on my knowledge base and execution of metrics in a spreadsheet I immediately went into search mode.  Meaning I showered the internet for spreadsheet solutions with more user friendly features and possibly direct connected features geared towards my specific reports.   Just weeks ago I found a free solution that has the exact technology I was looking for.  I was able to immediately input information and generate reports without spending hours just trying to figure out how to organize cells.  Annoying!  Check out Airtable.com or smartsheet.com
  4. Trade goods or services: Now this is a slippery one.  When we trade something with another company we need to be very careful to report everything (Mike’s right. Learn more here).  If we execute it correctly it is one of the best ways to save money.
  5. Tutorials: Today, you can basically have a college degree level education by watching videos online.  It’s amazing.  Example:  Instead of paying two designers to take on the extra design work I watched 120 hours of tutorials on Adobe InDesign (Magazine Design Program).  This allowed me to not only help fill the gaps where design was needed but I also took on an incredible understanding of the program and process.  This understanding has helped with understanding how to hire the right designers and where we can save money and become more efficient by utilizing the software to it’s full potential.

Some tools and tricks I use to get results without large investments:

  • CouponMate: This Chrome Extension searches for coupons on a site and gives you the best possible matches. I’ve used it on sites like Mailchimp and GoDaddy.
  • Calling the companies: It’s amazing what a simple phone call can do, even to some of the biggest companies. When I sign up for a service or product, I usually get on the phone with customer service and see if there are ways to drive the price down or find some hidden promos. Also, I sometimes ask if they have any “beta” programs out there that I could try for free. (Bonus: I always ask if companies would be willing to write on their blog about how my company uses their products or services. The value there is obviously free publicity but also you can get quality backlinks to your website, which Google really likes for ranking your site on search engines.)
  • Join perk based organizations: I recently joined founderscard.com.  It’s about $300 a year.  The program caters to founders of companies and provides over 200 discounts on popular goods and services geared towards helping companies start and grow.  I estimate that I have saved over $3,000.00 with this on travel, technology programs and office equipment.  Example: Founderscard.com members receive 25% off all Avis rental cars.

While I tried to bootstrap as much as I could, there were some tools and resources that were worth the investment right away:

  • Chamber of Commerce: I remember cashing in quarters to pay for a $25 entrance fee to Business After Hours. I ended up bringing on two new clients that night. Since then, my company partakes in most of the events and programs they provide. I can safely say the Fargo Moorhead West Fargo Chamber of Commerce has been one of the best reasons for our success and growth.
  • Quality Products: I am a huge believer in quality over quantity in my business. I spent a majority of my profits in the first five years improving the quality of my products. I travel the country attending and speaking at niche magazine conferences and nobody can believe the quality in our products for free local publications. There were hundreds of times I could have sacrificed quality and stuck that money in my pocket. I’m glad I didn’t.

As with any journey, there are always lessons learned the hard way. Here are two that I really should not have bootstrapped:

  1. Accounting: In the beginning I underestimated bookkeeping and accounting. I thought I should find the mom and pop firm that was the cheapest to help out because I thought my books were basic and simple. I didn’t realize I could have been using my numbers to make decisions, or setting my books up for success as I grow the business. I performed and learned every other aspect of my business but the numbers. BAD IDEA!
  2. Human Resources: I underestimated the complexity of human resources and frankly thought I didn’t need to worry about it with only a couple employees. For a few years I was guessing on important decisions involving employees.

Overall, I don’t believe I had the perfect recipe for success and growth, but I think I found a good balance of street and book smarts. I chose to be patient in growth. Now I’m at the stage of business where if I want to grow any further I need to rely on book smarts and professionals.

Cash is King

Cash is KINGWhen you’re just starting out, it’s important to remember one thing (well, a lot of things, but this one is really important). CASH is king. Why? In the early stages of a business, traditional financing may be hard to come by, so cash in hand is necessary to run your business.

You guys are really on the cash bandwagon.

Sure are. When you have limited financing as a startup, cash is a necessary commodity. You need it to pay vendors, make payroll, fund product or service development and buy equipment. You know, the kind of important stuff it takes to make sure your business is actually running.

Plus, cash can really benefit you in way of discounts. Some vendors may offer purchase discounts in return for prompt payments.

Okay, okay. Cash is important. So what do we need to watch for?

You can’t just use all your cash in hand to pay all your expenses. While you need to pay your bills and keep the lights on, you also need to be able to survive slow periods (all businesses have them) and be prepared for when cash is not coming in.

But you also need to prepare for when times are good. When growth is strong and increasing revenue generates higher inventory and receivables, you have to be prepared to meet demand. Increased working capital needs can consume cash, especially in periods of high growth.

What else should I pay attention to?

What industry are you in? Industry sectors can have an impact on when you collect cash and when you spend it. Some industries have the benefit of collecting cash early in the sales cycle. Think schools here. They collect tuition before classes even start. Other industries require spending cash early in the sales cycle. We’re looking at you manufacturing and wholesale. So examine your entire sales cycle when mapping out your finances and know that no two businesses are exactly alike.

Plus, while it might not seem like it when you’re just starting out, but you may want to acquire other businesses down the road. You’ll need cash to do this.

So cash is a good thing. Can I do anything to get a handle on it early?

Monthly projections can help you understand your cash cycle. Look ahead to periods of high cash outflow and plan. Take into account periodic events like taxes, bonuses, capital expenditures, prepaid expenditures and one-time events and account for them. Cash will not only help you in the early stages of your business, it can also be a catalyst to map out your overall financial journey (which we think is pretty fun, and a really good thing to do).

 

 

What You Want to Know: Sales & Use Tax

We want to give you a better experience, where you feel connected to your financial journey and confident that you’re making the best decisions for your business. As part of this, we’ll feature blog posts on frequently asked questions. No question is a dumb question, so if you want to learn more about something, just ASK.

You started your business with a dream. Now you’ve created a product people love and they want to buy it. As you get ready to sell, the first thing on your mind is sales tax right?

Don’t worry, we’re here to help. While it might not be as sexy as creating or selling your product, sales tax is important … and it can cost you dearly if you don’t pay attention to it.

First a few definitions …

NEXUS = a responsibility to collect tax

Typically, nexus in a state occurs if you:

  • Own or rent property in the state
  • Have employees including salespeople or independent contractors in the state
  • Employees make deliveries
  • File an income tax return in the state

Sales tax

A tax imposed by your friends at the government on the sale of goods and services. Sales tax is typically levied (collected) at the point of sale (when you purchase the product or service). The sales tax is collected by the business and then passed on to the government. A business must charge sales tax if it has nexus in that particular area (hence why we explained nexus first).

Use tax

To correct the price advantage out of state retailers have over retailers who have to collect sales tax, there’s a little thing called use tax. This is also a tax imposed by your friends at the government and is assessed at the same rate as sales tax. So how are they different? Well use tax is applied not when a product or service is sold, but after the sale. In other words, tax was not paid on the initial purchase, so instead it is paid to “use” the product.

Exemption Certificates

Some customers may claim to be treated as exempt (off the hook) from paying taxes. However, you should never take them at their word. Rather, always treat them as taxable until you are provided an exemption certificate.

As a rule of thumb, update your exemption certificates every three years.

We now further convolute this by saying that there are different types of exempt organizations (see this list) and not every item is subject to tax as there are different tax rules in every state. So (you guessed it) it’s best to work with your accountant when it comes to exempt organizations and items, as well as sales tax in general.

So how do you know when sales and use taxes are applied and when they’re not?

The answer is a little less than simple. But here’s the basic gist:

You should consider all sales subject to tax unless:

  • You do not have a responsibility to collect tax (cough nexus cough) in the state of delivery
  • Purchaser presents a valid exemption certificate.
  • Item is exempt from tax at point of delivery.

Use tax applies to all taxable purchases including:

  • Office equipment and supplies
  • Paper
  • Staples
  • Computers
  • Pens
  • Office furniture

Do you really need to be concerned?

Sales and use tax rules are constantly evolving and growing more complicated. This lovely complexity makes it vital for companies of all sizes to understand their environments so they’re in compliance with tax obligations.

Here’s just one example. Certain activities, such as selling a product over the Internet, or advertising through an online marketing company, can inadvertently establish nexus in a state, making you subject to that state’s tax laws. What does that mean for you? Well, if you have unknowingly established nexus, you can face responsibility for back sales tax, as well as super fun things like penalties and interest.

So yeah, you should probably pay attention to sales and use tax. The best way is to work with a trusted accountant who can help you see where you’ve established nexus, where you might potentially have issues, and help you track your tax obligations.

Advocating for Vacations!

Want to sell your business_

We all know those people. You know who I’m talking about. The ones who are so incredibly important that they simply can’t make any social function, future commitment or take a vacation. The success of their business, and ultimately their own self-worth, are tied to being present daily in their role.

Sometimes we don’t even have to look further than the mirror to find one of these super heroes.

Super heroes, unlike business owners, live into perpetuity and therein lies the problem. When it is time to transition your business you ideally get paid for what you have built. This assumes that you are not the glue that holds everything together. Success should be measured not by the time you spend in the office but the time you spend away from the office. The real value is in the team you have built and the processes you have implemented.

I haven’t come across a buyer yet that is looking for a business that is successful because it’s reliant upon them being there each and every day. Instead value is created when a seller can show a work force in place. It’s created when you can exhibit a refined set of processes or procedures and systems that capture and report the information needed so you can manage the business, but not also have to serve as the janitor, IT support person and the top revenue generator.

So before you think you are ready to sell your business, go on vacation! And then come back and assess the business you left and where you need to make modifications. Then go on vacation again and repeat the process until you have a finely tuned machine that runs without you. Only then are you ready to sell your business.

And as a refresher, it’s never too early to start thinking about selling. It’s important to prepare in advance, in case you didn’t get that from the example above (seriously, GO ON VACATION). By starting early, you can help ensure a smooth transition process. Here’s a few tips:

  • Get real. It’s important to get a realistic expectation of what your business is worth now and how to increase that value. There are changes that can be made and improvements added that don’t require a lot of time or money, but can significantly drive up value.
  • Gain understanding. It’s helpful to truly understand what your options are when it comes to selling a business (conveniently, we wrote this blog to help you navigate the options). There are several and it’s important to think about each, as well as the pros, and cons, to your business.
  • Be on the lookout. It’s never too early to start exit planning. You may face a challenging and highly competitive market when the time comes to sell your business. Even if a potential exit is years away, it’s important to focus now on key business issues, develop a planning process for the future exit and coordinate services with a wealth management team.

And one more bonus tip (for good measure): Take your CPA with you on vacation…just a thought.

S-Curve of Business: Stage 5

Don’t get confused. Read about Stage 1, Stage 2, Stage 3 and Stage 4.

Welcome to stage 5 of the s-curve of business, also known as breakthrough. If your business has reached this point it means your dream has taken off. As a result, you’re likely wearing many hats. You could be getting new customers, keeping on top of operations, delivering on promises made, making sales calls, keeping your current customers happy, and so on. In other words, you’re finding it very hard to say no, especially when each of these things is helping your company grow and thrive.

We get it. It’s an exciting (and probably incredibly exhausting time). It’s also a time when things can start to go very wrong. Why? You simply aren’t physically capable of doing everything yourself anymore.

This is the issue at the heart of the breakthrough stage – scalability. In other words, can you grow your organization so it operates on a larger scale? Or do you go back to where you were before?

This is a critical choice for entrepreneurs. While it’s great to see your dream grow and thrive, scalability is not always fun. You’re going to have to make some excruciating decisions, particularly about people. Are the right people in the right seats? Do their personalities and work styles jive with the culture and mission of the company you created?

Further, you have to be able to fund operating on a larger scale. Raising capital is tremendously difficult. In essence you are reinventing your company and transferring your value proposition (a statement that summarizes why a consumer would buy a product or use a service from you). Before the value proposition of your company was YOU. Now, it’s something larger and it needs to permeate through the entire organization.

These are tough decisions to make, but they matter if you want a healthy, sustainable business. It’s also important to remember how you got here and the importance of each step along the cycle. After all, all growth companies go through numerous S-curves during their existence, especially as they refine their products and services for their customers. Don’t believe us? Just look at the progression of companies like Apple or Microsoft.

So as you walk down the S-curved road, make sure to learn from each stop along the way. Generally speaking, the five stages are linear. If you skip over one, you may end up paying the price somewhere down the road.

No, we’re not being dramatic. Here are a few examples of things that may happen:

  • If you don’t formulate and go right into concentration, you’ll end up with a lot of activity with no direction or purpose.
  • If you don’t do the legwork of concentration, you’ll miss out on valuable learning experiences and insights that only come from hard work and perseverance.
  • If you skip out on the momentum stage, you’ll potentially miss the conversation related to how your company can run on a larger scale. Think clarification of the decision making progress.
  • Without taking the time to think through your future in the stability stage, you’ll miss the crucial conversation of where your business should go next.
  • Getting to breakthrough allows you to reinvent your company and build a larger, more scalable model.

So enjoy the journey, but also understand the importance of each of these stages. And we hate to sound like a broken record, but a trusted business advisor will be able to help you navigate each step. If you want to learn more, let us know. We’re always here to help.

Breakthrough

 

No Cost Consulting Services for Small Businesses

Guest Blog by the West Central Small Business Development Center

Small business owners play a crucial role in creating a vibrant, strong economy. Small business owners also have many hats to wear, such as CEO, CFO, COO, CMO, HR Director, and service provider.  Being an expert in all these different areas is a very challenging endeavor, especially since many small business owners did not go to school for business.  Small business owners are often faced with new concepts such as figuring out how to get a business loan, pricing, cash flow projections, business plans, and market research.  The good news is that experts are available in the each of these areas to assist small business owners.

If you or a small business owner you know would benefit from speaking with a professional, business consultant, the local Small Business Development Center (SBDC) may be of assistance. The SBDC assists entrepreneurs and small business owners by providing business consulting at no cost.   The no cost consulting is possible since the SBDC is a grant program funded in partnership with the Small Business Administration (SBA), local universities and colleges, state economic development agencies, and other local partners. The SBDCs are located in each state throughout the nation and have been providing consulting services for over 35 years.  Locally, the West Central Minnesota Small Business Development Center is hosted by Concordia College Offutt School of Business and serves nine counties in West Central Minnesota. The Fargo SBDC is located at the NDSU Research and Technology Park. The SBDCs recognize the value in small businesses and strive to assist new and existing businesses with no cost consulting services in financing, marketing, human resources, and business planning.

 

sbdc

Funded in part through a Cooperative Agreement with the U.S. Small Business Administration, Minnesota Department of Employment and Economic Development and regional support partners. All opinions, conclusions or recommendations expressed are those of the author(s) and do not necessarily reflect the program sponsors. Programs are open to the public on a nondiscriminatory basis. Reasonable accommodations for persons with disabilities will be made if requested at least two weeks in advance by calling 218.299.3037.

Accounting 101: DUDE, WHERE’S MY CASH?

I am profitable but I am running out of cash. What’s up with that?

Sound familiar? Often, profitability is confused with cash flow in the business world. However, those two measurements are not synonymous. So what’s the difference?

Let’s start from the beginning with some basic terminology:

BALANCE SHEET is the measurement of a company’s resources (CASH is one of those resources). A basic balance sheet has three components: assets, liabilities and equity.

  • ASSETS | the “stuff” you own or is owed to you. For example, cash, receivables, inventory and property and equipment are all assets.
  • LIABILITIES | the “stuff” you owe. For example, accounts payable, credit cards payable, gift cards outstanding, notes payables, sales tax, payroll taxes are all liabilities.
  • EQUITY | the businesses worth (the balance of assets less liabilities). Typically, equity is comprised of common stock, paid in capital, contributions/distributions and retained earnings (the accumulation of net earnings over the life of the business).

PROFIT & LOSS is the measurement of a company’s PROFITABILITY. A basic profit and loss has four components: sales, costs of goods, operating expenses and other income/expenses.

  • SALES | the gross proceeds received from the sale of a product or service.
  • COST OF GOODS SOLD (COGS) | the cost incurred directly related to the sales generated. These typically vary based on the level of sales. Here’s an example: the purchase price of inventory sold or labor and materials in a manufacturing process.
  • OPERATING EXPENSES | the normal, ongoing costs incurred to conduct your business. Think office wages, professional fees, office supplies, bank fees, and advertising.
  • OTHER INCOME AND EXPENSES | the sources of income earned and expenses incurred outside of the normal course of business. More examples? Gains/losses on investments.

PROFITABILITY is what’s left after deducting all of the business expenses from the income generated. Still not sure what that means? Let’s break it down …

SALES – COSTS OF GOODS SOLD – OPERATING EXPENSES ± OTHER INCOME/EXPENSES = NET INCOME (PROFITABILITY)

Still with us? Now here’s how cash flow works (and no, they’re not the same).

CASH FLOW is the difference between the cash at the beginning of the period and at the end of the period. At its simplest form, cash flow equals the cash changes in assets (other than cash itself – that’s what we are calculating), liabilities and equity. Cash flow is provided or used by various activities of the business. The activities are broken into three categories: operating, investing, and financing.

BEGINNING CASH BALANCE

± NET CASH FROM (USED BY) OPERATING ACTIVITIES

± NET CASH FROM (USED BY) INVESTING ACTIVITIES

± NET CASH FROM (USED BY) FINANCING ACTIVITIES

= ENDING CASH BALANCE

  • OPERATING ACTIVITIES | starts with net income (that’s right, profitability is a component of cash flow) and adjust for non-cash transactions. What non-cash transactions? The adjustments include, but are not limited to, depreciation, gains and losses on sales property and equipment, and bad debt expense. Once adjusted for the non-cash transactions, net income is adjusted for the changes in operating assets and liabilities. What are those? Operating assets and liabilities include, but not limited to, accounts receivable, inventory, prepaids, accounts payable, and accrued liabilities are added or deducted.

NET INCOME

± NON-CASH TRANSACTIONS AFFECTING NET INCOME

± CHANGE IN OPERATING ASSETS AND LIABILITIES

= NET CASH FROM (USED FOR) OPERATING ACTIVITIES

  • INVESTING ACTIVITIES | includes, but not limited to, cash payments to purchase investments, property or equipment or fixed assets. Or on the other hand, cash received from selling an investment (or receiving a dividend from an investment), property or equipment.
  • FINANCING ACTIVITIES | includes, but not limited to, cash payments on long-term debt, cash received from issuance of long-term debt, net change (cash received and paid) on a line of credit, and cash contributions or distributions from owner.

All that goes into cash flow? Sure does. There are several other sources and uses of cash than profitability alone.

So if you have a lot of work and have sold a lot of your product or service, you may be really profitable. But, if your customers aren’t paying you in a timely manner, you may not have a lot of cash.

Or, in another scenario, if you took out a loan to start or expand a business, but you’ve been selling your services for less than they cost, you may still have some cash, but you aren’t profitable.

Moral of the story? They’re not the same, so don’t confuse them. You can have profitability without adequate cash flow. Or vice versa.

 Seem like a lot to manage? We can help. Contact us about our CFO 2.0 services.

Profitability v cash