Tuesday, October 13, 2009

Wil Schroter: Being broke means being disciplined

Wil Schroter: Being broke means being disciplined

While everyone else is running around trying to find capital for startup companies, let me be the first to tell you the one true benefit of not having any cash – it forces you to be disciplined. Being broke means being disciplined about the investment decisions you make and forces you to be resourceful to find solutions to your problems.

Smart and resourceful startups that can find creative ways to solve their capital crises emerge stronger and faster than their capital-laden counterparts who throw money at problems instead of solving them. When you’re starting up broke, don’t think of it as a handicap – it’s an incredible opportunity to strengthen your company with the ingenuity required to succeed on a budget.

A dollar bill is a blindfold

Having money in the bank keeps you from worrying about things like making payroll, customers paying their bills on time, and covering rent. And that's the problem. Those are things you should be constantly worried about even if you do have money in the bank. You should always be conscious of whether or not you are getting paid on time, whether the people on your payroll are carrying their weight, and whether you actually need the things you're buying for the business. That's healthy.

You can numb the pain of most business problems by throwing money at them, but that doesn't necessarily constitute a solution. The problem is two-fold. First, cash has a funny way of treating the symptoms of organizational problems without actually addressing the root causes. This may work while you have cash to toss away, but as soon as your receivables are late that problem will be right back in your face. Secondly, a startup rarely has the spare resources to treat a problem with money. They need cash to grow, not to throw at problems.

Everyone understands not eating

You may find people in the company that don't share your same fiscal responsibility. They tend to think of company money as Monopoly money that can be spent like water. But I can assure you that the first time you miss payroll due to poor planning they'll quickly understand the value of being financially conservative. Some people don't understand cash flow, but everyone understands not eating!

For this reason you need to make sure people understand that the same dollar you save by buying a slower computer or a cheaper desk is the same money spent when it comes time to offer a Christmas bonus. I remember when our accountant once illustrated this point brilliantly. During a discussion with the founding members of our company when one of us complained about not getting a paycheck that week the accountant pointed to him and said "you want to know where your paycheck is? You're sitting at it! It's the desk we bought for you last week!"

Validate your model with customers, not capital

A disciplined company looks to validate its business model with customers, not capital. Anyone can go out and raise someone else's money - that only validates the willingness of an investor to part with their cash. The true validation of a business model comes when customers write a check for the product.

When a company is broke it can’t afford to limp along without closing customers. Closing customers and collecting checks is directly related to keeping your job and getting your paycheck. Losing sight of that fact is a recipe for disaster. Having a pile of money available can make grave mistakes like missing sales forecasts and extending sales cycles seem less critical.

Being broke means creating capital

Not every problem needs to be solved by finding additional capital. Savvy entrepreneurs know that being broke means you need to create the capital you need instead of raising it. Need to hire some additional staff? Create a commission or stock options program that rewards their performance in lieu of paying them for just their time. Need to find more customers? Develop word-of-mouth campaigns that are designed to drive in new customers and reward existing customers for their referrals.

Just because you’re broke doesn’t mean you can’t get things done. Pushing everyone in your organization to be more resourceful will instill a culture of discipline and responsibility. The next time someone makes a capital request, ask them what solutions they can offer to avoid spending any money. Only when you’ve exhausted your free solutions should you reach for the checkbook.

Never forget your roots

Incidentally the very discipline that you use to keep your cash-strapped startup growing will be the reason you have some dough in your bank account later on. Don’t forget this! As your organization grows and the new guys come on board, they may not remember what it was like to have to starve until your next paycheck. Don’t be afraid to remind the company that it’s the penny-pinching discipline of a small startup that makes a large company’s successful too.

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Blogger bigpicturerickfalls said...

You are correct Sir.

Anybody can throw money at a problem, just look at our government.

Digging deep and making it work in spite of adversity is what makes Americans and those that subscribe to the freedom that being an American represents hang tough and MAKE things happen.

Thanks for giving it to us straight.

October 13, 2009 at 1:56 PM  

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