Continuing along with my Bootstrapping 101 series I want to discuss a savings plan that I have used since I first came online and how it has allowed me to heavily capitalize my companies.
When you’re first getting started with your own venture it can be frustrating at times while you’re building and generating very little revenue. Especially in today’s world of instant gratification, we want to work our ass off one day, and reap the benefits the next. But the revenue you generate should be saved and spent wisely.
Working in the online world over the last 15 years, I’ve seen a wide arrange of people, make a lot of money. Some range from very young (late teens, early twenties) to the late 70s.
The older generations have lived through hard times including the great depression. They understand the old school methodology behind savings and limiting exposure to credit.
The younger generations have learned to spend, spend, spend as long as they’re able to finance it with credit cards. Heck, retail stores across the United States offer you up to 10% off your purchase if you sign up for one of their high interest credit cards.
We’ve adapted the culture that we want what we can’t have. Get a big bonus? Well it’s time to go spend it! Become your own boss and have a $100K month profit; finance that new Lamborghini! This thinking is flawed.
Since 1998 I’ve co-founded nine different online startups. None of them have ever taken on a loan and they generated a strong $XX,XXX,XXX. A lot of my success stems from my four-step plan I immediately implement regardless of my venture:
Step 1 – Don’t Take On Financing
I covered this in my first bootstrapping post. Starting a new venture with a credit card or financing from a third party lender is dangerous. Unfortunately its become very acceptable in today’s culture. Too often I’m seeing young entrepreneurs build something cool, find an investor, and attempt to find profitability once they’re capitalized by someone that may not have a clue what there business is about.
American Express offers a credit card called the Plum where small businesses can actually defer payment interest free for up to 60 days. This is setting yourself up for financial suicide!
If you’re starting your own business you should have saved up enough money to do so. Having a good idea and a healthy work effort will only get you so far. If you anticipate hefty startup costs, then you best be saving before you terminate your current job.
I’m a bit of a different breed. I started my companies when I was a kid, still living at home. This provided me with a low barrier to entry because I didn’t have much to lose (not like I was supporting a wife, kids, etc.). This also taught me the core values I still live by. When I was 13 years old just getting started, using a credit card was NOT an option. My parents weren’t going to give me theirs, I had to figure out how to make things work with only the capital I was able to generate.
Without rambling on about the disadvantages to using credit/taking on investors – my best advice is don’t do it. If you cannot afford to begin your venture without it; wait. In the long run, it’ll be worth it.
Step 2 – Re-Invest 70-75% Of Your Profits
Once you’ve made the step to creating your own business and you’re running profitable each month, it’s time to save and re-invest back into your business. This takes a lot of discipline.
Do you know how many “affiliate marketers” I’ve seen over the last decade that make their first $100K profit month and follow it up with the purchase of an exotic sports car? If business is growing THAT fast – what would $75,000 of that money do when it’s put right back into fueling the growth? That is almost the yearly salary for two employees!
Before we talk about profit though we have to talk about deductions.
Here in the United States, we have to pay federal, state, and sometimes city tax. If you’re an Entrepreneur with your first business, you MUST take this into consideration. Getting yourself into tax debt is worse than credit card debt because the government can literately step in and seize your assets or levy your bank account. Unlike companies like American Express, the United States government is GOING to get their share. Especially if you’re making it.
After you’ve deducted your taxes (mine is around 50% and it will go up next year), you then have that amount to re-invest and pay yourself. So let’s say you made $100K one month. $50,000 is set aside in an interest bearing savings account that is going to be used to pay taxes and the other $50,000 is what you have to work with. If you re-invest 70% you’re going to put $35,000 back into the business and then pay yourself/partners $15,000. Unfortunately, that exotic sports car is out of the picture [for now] but you’re still not living on the street :).
Now this is much easier when I’m talking about $100K a month. What if your company is only making $5,000 a month in profits? It’s time to take the discipline to another level.
At $5K a month, your tax deduction is going to be around 35% (estimating federal, state, and possibly city tax). So that means you have $3250 to work with after you pay Uncle Sam. I would put $2,275 back into the business and then live off the $975.
If you’re sitting there thinking this is impossible, I promise you it’s not. I’ve done this before. The $2,275 can be put towards ESSENTIAL living expenses. Talk about a conservative living!
By figuring these numbers – you’re then going to get a realistic approach as to what it takes to operate your own business. Profit vs. Take Home is VERY different and most of your competitors don’t have the discipline to do this.
Step 3 – Have Adequate Capital Reserves
I recommend having at least four months average profit on hand in liquid capital at all times. I don’t mean tied up in the stock market either. This capital should be in bank accounts that you can access at any given minute.
Remember the “dot com crash?” I sure as heck do! The ONLY way I kept my businesses going after that, was having capital reserves. I had enough money to keep my businesses going while I overcame the bad ad rates. 99% of my competition at the time went out, allowing me to buy up a lot of their sites. This is how I was so strong post dot-com crash.
So when you’re re-investing that 70-75% make sure to throw some in a savings account! I do this for not only my businesses but my personal finances as well.
Just because you’ve made it, doesn’t mean you have to spend it. Save for a rainy day so you’re not scrambling for cash if everything goes to crap. I’ve seen it happen before. It’s not fun.
Step 4 – Steamroll Your Competition
Chances are this post has you a little bit annoyed at me. “This isn’t fair, Ryan.” I know. It’s not easy being an Entrepreneur. This is this stuff that no one talks about because most don’t do it.
So look at it this way. If you do this, you’re gaining a substantial competitive advantage over your competition. Companies that don’t save this conservatively are weak. Weakness is what I look to exploit and gain the competitive advantage. The first hiccup these companies run into are when shit starts to roll down hill. How much of this have we seen in the CPA industry over the last five years?
Also, I’m not saying not to have nice things. I have nice clothes. I have a nice home. I drive a nice car. But I didn’t have these things until I followed my five-step plan and could afford it. Taxes paid, capital reserves, no bills, and then you can treat yourself to what you’ve earned.
Feel free to add your input below! Best of luck capitalizing your ventures!