This post is a follow up to one of our previous posts that discussed starting a software business during the recession. In this post, I want to focus on the cash flow aspects for very early stage software startups. A few years ago, we started the company with nothing in the bank and we've managed to not only survive but prosper regardless of today's tough economic conditions. It is possible to launch a software startup with no money: the tradeoff is time. It will take longer to get out of the very early stages.
Context / Introduction
Before starting, I'd like to point out that the tips that follow are only valid in a particular context:
Understand that these tips are for the very early stage
- Your first business goal is to get out of the very early stage as soon as possible.
- Lots of these tips concern petty little details. However, together these details matter when at the very early stage, when you're fighting for survival.
- Survival is a huge milestone but it isn't the end goal
You have no money and aren't interested in loans.
- If you have no money, this is probably your first venture. I strongly feel loans are a bad idea for your first venture, but others have different opinions.
- Cash is a great accelerator - once you've launched your first business you'll probably have a need for speed and will either have cash or be more open to debt/equity financing because you'll have already learned what you have to learn in organic growth.
You're starting a software company.
- It is possible to start a software startup with limited cash. You've picked a good industry. If you wanted to become a dairy farmer, you would need a massive initial investment. However, for a software startup, your investment will be time writing code - not acquiring assets.
Tip 1) Sell to the right group
Since this is your first business and you have no money, you need to establish a consulting sideline selling to businesses that will give you a good return for your time (even if you're building a product for individuals). You won't be able to pay your bills selling $20 licenses to individuals in the early stage. We recommend selling customized versions of something that will help you grow your core product, as long as you can keep the intellectual property. Read more about this strategy in our previous post.
Everyone values the dollar differently. The earlier stage you are, the harder it is to define appropriate pricing given your credibility level and you don't give the same value to each dollar as your customers. As you grow, you’ll find your sweet spot and will be able to focus on your consulting clients that are right for you.
Eventually, you should aim at moving out of consulting, as it doesn't scale.
Tip 2) Minimize your expenses
Assuming you have no money, it's important that you only spend when necessary. At a high level, you need to be versatile and be able to do as much as you can on your own. Later, you'll be able to delegate but not in the early days. Of course, know your limits and get pros to do things that are impossible for you to do properly.
- Don't hire an accountant to prepare invoices for you. Learn how to use accounting software and do it yourself. Only hire the accountant for an annual review or for real accounting work. Once you know how, it will take you a few seconds or a few minutes to do the most common tasks - you won't be paying someone four hours of work at a high hourly rate.
- Don't hire a law firm to review a simple non-disclosure agreement sent to you by a customer. Learn to read legal text on your own. Only hire a law firm when you've got something important to prepare or review.
There are plenty of examples of ways not to spend money when you're just starting out and have none of your own. It's time to learn things on your own.
Be smart about the commercial bank account you choose
I've dealt with a few different banks over the years. If you're a tiny business, it is good to know a few simple facts and comparison points.
Get a business account with a variable monthly fee
- Don't bite when they offer you a $50/month fixed rate. You won't have enough transactions to make it worthwhile to upgrade. When you reach that point, switch to the fixed rate plan that is a best fit for your business. You can easily save $480 per year.
- Some Canadian examples: Desjardins: $7/month, TD Canada Trust: $12.50/month, Royal Bank of Canada: $6/month
- Some variable plans charge transactions on top of the minimum monthly fee. Do your homework.
Know the minimum balance you need to get it for free
Get an ING Direct Savings Account
- Some customers may pay you in advance or you may get grant money. Bottom line: you may end up with cash that you can't spend for a few months to a year. (Actually, you can spend it if you know more will be coming in - depends on your management style.) If you do have it in the account, earn interest on it.
- Business accounts often don't give interest. If they do, the interest is horribly low if you don't lock it in. (Not paying service fees is often more than the amount you'd earn in interest anyways).
- ING Direct's account is free. They have the best rates I've seen for low amounts that can be withdrawn at any time.
- Best of all, they have a referral program. Both the new member and the referrer earn $25. In today's market, this could easily end up being worth more than the interest you'll generate in your first year. Our orange key is 33514316S1 – go ahead, signup (personal or business) and you’ll help support us and receive $25! :)
Don't get a commercial credit card for your purchases
- Unlike personal cards, they're not free and most don't have any rewards programs.
Do you really need to accept credit cards?
- It is a good fit for some users or services, but know the costs. If you have few transactions but most of them are high value, you're better off with a wire transfer.
- Some banks charge you more for wire transfers than others.
- Remember that cheques are slow - you don't have access to the funds are week.
- You'll be paying $20-50 per month plus 2-3% per transaction. This quickly amounts to several thousand dollars.
Will you be dealing with multiple currencies?
- We're a Canadian company but we have lots of clients in the US and in Europe. In the very early days, we chose not to open two separate bank accounts (one in each currency) because of the associated ongoing operating costs and increased accounting complexity.
- Banks all have different exchange rates. However, I've found one bank consistently gives us a significantly worse rate when receiving transfers in another currency. A few percentage points makes a huge difference as the size of the payments increases.
- The larger your conversion, the better your rates. Talk to a specialist like @JamesonBankTrav.
Minimize your telecommunication fees
Don't get a commercial telephone line via large companies
You'll pay much more than needed. Investigate Voice Over IP solutions such as Skype. You can get your own telephone number and free long distance in Canada + USA for an annual fee of $60. This service saves you hundreds per year. Don't get a fax unless your customers nag you for your fax phone number often enough. If you need one, look at online services such as myfax.com which deliver faxes by email and give you toll-free fax numbers for less than what you'd pay to get a separate telephone line in your office for the fax, without the clutter of a deprecated device.
Don't sign-up for a massive cell phone plan if you've got empty pockets
Depending on what you do with your phone, you can save upwards of a thousand dollars a year by downsizing to a prepaid plan. Smartphones are great, but depending on your situation, it might be a wise choice to minimize those expenses. Let's hope you're not locked into a crazy-expensive three year plan! In the end, this is a personal decision which depends on your personality; once you've tasted a smartphone you may be unable to go back. Just keep in mind you might be paying much more for your cell phone than the much faster Internet connection you use all day.
Minimize your rent
Use a co-working facility
One tip often given to people starting their own company is to avoid renting office space too early in the process. Instead, work from home or from a more affordable co-working location. Not only do co-working locations reduce costs, they help you build your business because of the contacts you can make there. Once you’re read, upgrade to shared office space.
Don't minimize everything
In addition to being able to exchange services with other companies to cut costs, there are a few places where you can't afford to cut costs.
One thing you don't want to be cheap on is branding. Your image is everything - quality needs to be high. Get nice business cards created by pros. Don't do your own web design if that's not something you specialize in. Your product will look amateurish and you'll lose sales. There are tons of affordable graphic designers out there: find one and have something nice created. Use online marketplaces such as 99designs. Since you're still a software expert, however, you should know enough HTML and search engine optimization techniques to be able to maintain your website. If you're a horrible writer, have someone review your content. This basically boils down to knowing your limits; there are some things you won't be good enough at even if you try.
Hardware & work area
We agree with Joel Spolsky's view that you should buy the best computer hardware and computer chair you can find. These are your primary tools and they are relatively inexpensive compared to your salary, even when you have very low revenue. One investment that is definitely worth it is a second monitor as it tremendously increases your productivity.
As much as your work environment is important, you should also value your health. Even if you're living on a very tight budget, don't eat hot dogs all day. Proper nutrition and good sleep cycles keep you in good health and makes you more productive. You should not be falling asleep in the afternoon. Starting your business is a marathon, not a sprint. Make sure your lifestyle is well adapted for a marathon.
Tip 3) Leverage your money
We've already covered this part in a previous blog post. Know what government funding opportunities are out there. Some require matching contributions. Some are based on your expenditures. Look around for these opportunities but mostly talk to other people to know what's out there and what's worthwhile.
Tip 4) Cash flow projections for dummies
You should always keep an eye on your cash flow, not just your revenue. I've created a very simple Excel spreadsheet to help with our cash flow projections. This one is simply a template with some random numbers in there. The one we use internally is a bit more complicated as it includes things such as currency exchange rates, taxes, etc. Build it however you like, but I've found that the two most important elements in there are:
1) Past Sales versus Projected Sales
What are my known sales (recurring revenue) versus what serious leads do I have in the pipeline. Being conservative, I base my business decisions on my past sales not my projected sales because I've learned that projected sales are often postponed. We have long sales cycles that culminate with a large sale which has a big impact on that month's revenue. Separating known sales from projected sales is of critical importance because of this because we either make the sale or get zero revenue from that customer in that month. If you're selling lots of lower value items (subscriptions to your service, for example), each individual customer has less impact on your total monthly revenue.
Given our current burn rate, when will we run out of cash if none of the sales in the pipeline are realized. This is useful to help you decide if you can hire and/or if you can give yourself a raise. It can also make you realize you're heading towards a problem and you need to correct the situation as soon as possible.
It would be nice to have a simple, open source, application that helps business owners track their cash flow projections in this fashion. You could go overboard and integrate it with accounting software, but I think it's nice when it's simple.
When you start your first company, and you have no cash on hand, you need to focus on making money and keeping the little money you have. Survival is a major milestone, but remember that it isn't the end goal. You'll learn tons of things along the way, and once you do leave the very early stages, you'll need to manage your cash flow properly. Later on in life, you'll probably start another business - this time you hopefully won't be as strapped for cash - and you'll be able to speed up the whole process.
I'm not sure what is harder between:
- A) Going from nothing to survival
- B) Going from survival to success
I do know, however, that going from nothing to survival appears a lot easier if you have cash to start off with or if you've done it before. Since success is in the eye of the beholder, it all depends on what you want to achieve.