The Cash Flow Blog

There are few things more critical to bootstrapping a business than managing your cash.

The worse thing a bootstrapper can do is run an organization that digs a hole deeper each month through increased expenses and decreased revenue. Cash flow neutral is a minimum requirement. Sounds obvious. Yet I've witnessed more than a couple businesses fail because they unnecessarily spent money faster than their ability to make it.

Inspired by ProBlogger, here are my top five common cash flow mistakes to avoid:

Inventory. Buy, build, sell, collect, and repeat. Don't buy more than you can sell. When you're a multi-millionaire you can carry big inventories and benefit from the intangibles associated with it. As a bootstrapper, big inventories of raw materials are a back-breaker.

Credit. Just because you can get a line of credit doesn't mean you should use it. Don't. You don't need most of the stuff you want to buy. Don't worry about not having the best computer, printer or tools. Make money with what you have and upgrade later.

Work. Don't hire to be done a single thing you can do for yourself by working a few more hours. I know a lot of consultants and authors tell you the opposite – hire people to do the back-office while you focus on other areas of the business – but they're wrong. You need to know and understand every detail of your business. Like most things, once you're making wads of money you can hire staff. In the meantime, it's better to preserve capital and work the extra hours. Bootstrapping is not a Monday-Friday 8-5 job. If that's what you're looking for you ought to return to traditional employment.

One of the biggest sources of failure I've seen in new businesses is where the owner works at their business as they would work at a traditional job, with regular hours and regular workdays. I'm not saying you have to be a workaholic to be an entrepreneur. But you have to shed the idea that being your own boss means working when you want to. That's a fantasy that assures failure.

Prudence. If you don't have a cash management plan, you're a fool. Going on your gut in business is another surefire way to fail. You don't need to have a 100 page business plan tabulated with charts, graphs, and detailed financial spreadsheets. But you better have a plan that shows what's coming in and what's going out – a real plan with dates, assumptions, and honesty. Throwaway your rosy glasses and assume the worst date, not the best when it comes to shipping, receiving, and collecting. Don't act without caution and careful thought.

Frugality. Drop the Fortune 500 mentality. Bootstrapping isn't about being cheap, it's about being self-sustaining. This means you don't have to have or want the best of anything in terms of office space, tools, etc. You need what facilities and tools make money and get you to cash flow positive as quickly as possible. You can go plush if want when you have money to burn. For now, focus on necessity.

There are five common cash management mistakes I've seen of bootstrapping businesses. What would you add to my list? Read more…