Bootstrapping a business is a perfectly viable (maybe even preferable) path to take, but bootstrapped financing comes with limitations.  You don’t have the money to hire the help you need, so you get into the habit of doing it yourself.  In fact, in the early days it’s not even an option - you MUST do it yourself.  But, there’s danger in learning this lesson too well and thinking that what works for a small business will work for a not-small business.

If you want to grow, you have rely on other people to do important things.  It’s a mistake to think you can accomplish big things by hiring only low-level people to do the grunt work while you fill all the valuable roles.  There are too many different skills required and you don’t possess them all.

What Do You Do Well?

The first step is to be brutally honest with yourself; what is it that you truly excel at? Is it sales? operations? strategy? Next, identify those important roles that require skills you don’t have.  If you’re an ace business developer, you probably need an operations wizard.  If you’re a big thinker you’ll need someone who’s good with details.  Choose the work for yourself that will play off of your own strengths - offload your weaknesses.

What About The Things You Don’t

Now that you’ve decided to concentrate on what you do best, how do you make sure the other important stuff gets done?

1) Look at your current employees.  Do any of them have the raw material to step up?  Since you’ve been keeping them under wraps up to this point, they probably need training - but don’t assume that just because they haven’t been doing something they’re incapable.

2) If you don’t have someone in house that can be brought up to speed you might want to recruit someone new.  Make sure you fully understand what role you’re recruiting for and looks for those skills.

3) Outsource - especially when a role needs very specific experience but you don’t need it full time.  Only very large companies have lawyers, and PR people, and the like on staff - most businesses outsource these on an as-needed basis.  You can do the same with a multitude of roles: marketing, HR, accounting, etc.  Many highly qualified professionals are out of work these days, so hiring a savvy consultant in any number of fields is much easier now than it used to be. Take full advantage of this opportunity to receive quality help from able professionals.

4) Partner up with another company - one that has complementary strengths to yours.  This is a common approach for companies with strong technical or product abilities and weak marketing or distribution.

An Investment That Pays Off

Keep in mind that starting and growing a business is going to cost money.  There are times to be frugal, and there are times to be bold so choose wisely.  Concentrating on your strengths and investing in shoring up your weaknesses is a bold move that will pay dividends in growth and profits.

Going John Galt

Payroll Is Not Reality

The smart business owner manipulates his or her salary to minimize taxes.  One of the most common methods is to keep salary low and profit high(er) and thereby lower FICA taxes.  A common opposite strategy is to keep salary high, thereby lowering the “real” profit, in order to maximize 401(k) contributions.

There is no absolute right or wrong approach to setting your salary.  Every situation is unique, with lots of moving parts, and you should work with you advisors to craft a strategy that works for you.  The mistake that occurs is assuming the salary you pay yourself accurately reflects the true value of your contribution as an employee.

Neither Is Your P&L Reality

If your salary is over or under the true value of your work, then your net income is overstated or understated by the same amount in the opposite direction.

If you want to know the real profit of your business you can do this simple calculation:  Actual Salary + Actual Net Income - True Salary = True Profit.  Where True Salary is the amount you would have to pay in the open market for someone else to do the job you do.

The True Profit is the number you use to evaluate the success of your business as if you were an outside investor.

An Example

John has owned and managed his distribution business for 10 years.  In the last year, the business had $3 million in revenue, a net income before taxes of $300,000, and John paid himself a salary of $75,000 for being the CEO of the company.

A net income before taxes of 10% for a company of this size, age, and industry is OK, but not stellar, and John is relatively pleased with how things are going.

However, John determines that the market value for a CEO of a company in his industry and of his size is $150,000 a year - $75,000 more than he pays himself.  His company’s True Profit is: $75,000 + $300,000 - $150,000 = $225,000.  Or 7.5% of revenue before taxes.  Not so great and John has some work to do.

What Does It Mean?

You can only evaluate the success of your business if you use accurate information.  The first step is to stop thinking of your salary and your profit as one pot of money.

“Milspeak”–the soldier’s argot that is rich in irony, brutally efficient in conveying the immediacy and dangers of warfare, and can be a shorthand way for separating combat soldiers from fobbits (Derogatory term for soldiers who never leave an FOB -Forward Operating Base)

If you’re being influenced by external factors you can’t control, you might as well embrace the situation.  Complaining isn’t going to do any good.  That leaves going AWOL as your only alternative.

A concept that applies to any investment, whether in your business, in the stock market, or Las Vegas,  is Risk of Ruin.  This is a statistical concept with lots of math involved and you can read more about it at these two Wiki pages (Kelly Criterion, Gambler’s Ruin) if you’re interested.

In brief, Risk of Ruin is a methodology for calculating how much of your available funds to invest in an endeavor with a positive expectation.  A positive expectation being one in which the return is greater than the odds.  If you were to bet $1 on a 50/50 coin flip and receive $2.05 (your original bet plus $1.05 in “profit”) when you won, that would be a positive expectation.  If you received $1.95 (a $0.95 profit) upon winning, that would be a negative expectation.

Even long odds can have a positive expectation if the return is big enough: a 2000-1 payoff on 1000-1 odds is positive.  The trick in this situation is to stay in the game long enough to take advantage of the positive expectation.  If you risked every thing you own, you’d go broke most of the time.

Guard Your Capital With Your Life

And that’s the lesson for entrepreneurs.  Even if the payoff is large, if the odds against success are long, don’t risk all or most of your available capital.

We read all the time in the business press about the entrepreneur who risked everything, beat the odds, and reaped the rewards of money and fame.  But we don’t read about the other thousand who didn’t win and went bankrupt.  It’s called Survivor Bias.

You can read more about Survivor Bias and how it applies to entrepreneurs in my post on Luck and Success.

Experiment, Evaluate, Repeat

A better approach would be to risk a little on a lot of opportunities, discard the ones that don’t work, and then invest more in those that look promising.  When you have something that’s clicking and starting to pay off, that’s the time to dedicate your all to the project.

In brief, most companies today are still an unnatural bundle of three fundamentally different, and often competing, business types:

• Infrastructure management businesses – high volume, routine processing activities like running basic assembly line manufacturing, logistics networks or routine customer call centers.
• Product innovation and commercialization businesses – developing, introducing and accelerating the adoption of innovative new products and services.
• Customer relationship businesses – building deep relationships with a target set of customers, getting to know them very well and using that knowledge to become increasingly helpful in sourcing the products and services that are most relevant and useful to them.

What’s this mean for the entrepreneur trying to grow his or her business and shore-up cash flow and profitability?

If even a company with the resources of Dell recognizes the difficulty of trying to do all three, how much more challenging must it be for the business owner with a dozen employees, a stretched-to-the-limit line of credit, and 20 urgent items on their daily To Do list?

The Sweet Spot for the Smaller Company

It seems logical to me that a Customer Relationship business type is the natural competitive advantage for the entrepreneur.  Personal relationships with customers and nimbleness are the smaller company’s strengths.

Product Innovation is a feast or famine endeavor with high risk and is probably best handled by “two guys in a garage” who keep their day jobs or the start-up designed specifically for innovation and with deep-pocketed investors.

You can read more about my thoughts on this in a subsequent post: Innovating and the Smaller Company, and in a previous post: Luck and Success.

Infrastructure Management is best left to the large organization that can take advantage of economies of scale. If you’re in manufacturing, distribution, or similar business, you’d have more success concentrating on flexibility and customization.  Which is really just another facet of customer relationship management.

Now Is As Good A Time As Any…

To question the assumptions you hold about the business you’re in.  The economy is going through a rough patch, credit is less available, and your customers are hesitant to take on significant new obligations.

It’s your job to use your limited resources in the most effective way possible.  The first step is concentrating on what you do best.

And speaking of tough economies, you might want to read my series on Surviving and Thriving in a (Possible) Recession.  Part 1 can be found here.

Who Knew Software Geeks Were So Smart

Way back in the mists of time, maybe 30 years ago or so, software developers then, like today, were struggling with the unreasonable demands of their customers - both internal and external.  The customers wanted a solution tomorrow, that was bug-free, and didn’t cost an arm-and-a-leg.

Someone very smart came up with a simple solution to communicating the problem to customers and getting them to make tough choices.  It was called “Pick Two”, and did more to crystallize the problem than any lengthy whitepaper could dream of.

• You can have it Good.
• You can have it Fast.
• You can have it Cheap.

          Pick Two.

Just 17 words.  Even shorter than the Gettysburg Address, and just as effective.

Pick Two Applied to Healthcare

Not too long ago, Arnold Kling of EconLog posted his version of a “Pick Two” on healthcare:

• You can have the best quality healthcare.
• You can have unrestricted access to healthcare.
• You can have someone else pay for it.

          Pick Two.

I think this does a great job of summarizing the debate on healthcare in just 23 words.

Delegation and the Business Owner

So, in the spirit of experimentation, I am going to attempt an occasional series of Pick Twos.  Maybe we can create a new Meme together.

Today’s inaugural contribution:

• You can grow your business.
• You can do everything yourself.
• You can have a life.

          Pick Two! 

(To be honest, if you pick the second option, you’re probably stuck with Pick One.)

Think about it.  Agree? Disagree?  If you think you can have all three, prove it.

Have any Pick Twos you’d like to share?  Comments are open.

They’ve put up a companion blog for the book and will give you a free sample.  Check it out.

Next, Conversation Starter has advice on How to Reward (and Retain) People When Money Is Tight.  Here’s a snippet:

• Responsibility along with empowerment is the best motivator
• Recognition inspires, not only the recipient but also others
• Different people see value in different things, so one should strive to understand what is important to individuals working for you. This is especially critical when working in an unfamiliar cultural environment.

Lastly, Jeff Cornwall of The Entrepreneurial Mind says: "Turn Your Competitors into Your Sales Force."

What seems like crumbs to them can become your feast.

Read the whole thing to see what he means.

Of course, it’s easy in hind-sight to see the mistakes that the newspaper industry is making, but what about you?

Of course, there are trees in your business too. There are trees in the photography business (chemicals) and in the music business (plastic) and even in the personal computer business (computers). They may not be called trees, but they’re there.

This idea is worthy of some discussion.  Have any trees in your business you’d care to share?

The MarketingProfs give us Five Inexpensive Direct Mail Tools to Generate Sales Leads Fast.

My favorite counter-intuitive Tool: Special Delivery.  You’ll have to read the article to see how this can be inexpensive - and effective.

Finally, John Jantsch of Duct Tape Marketing advises Creative Emulation as a means to innovation.

Some of the best marketing innovations I have witnessed came about by some smart marketer emulating a concept long established in one industry and brining it over to another.

Happy Hours for florists?  How ’bout Ladies’ Night for dentists?