Bootstrapping - How to start a business on just your good name.
In Accounting today we were talking about "increasing" your debt. This relates to A.P. (Accounts Payable) and how a Credit to AP "increases" your debt. Thankfully, many of the students took issue with increasing your debt as a bad thing that should be avoided. However, I also noticed this as an opportunity to talk about the power of the A.P. and how it can be leveraged to start or grow your business.
Accounts Payable - A.P.: This is a liability (debt) that you owe a company for products/services. In a sense, its legalized shoplifting because you are leaving with supplies/inventory without paying for it.
Vendor: A Company that your Company buys items from. Most "people' are not familiar with all the companies that act as Vendors. The customers of Vendors are other businesses. Also knows as B2B's (Business to Business).
Credit: Your trustworthiness, and a judgement of your ability, to pay for something later. (Having a friend buy your lunch today with the promise to pay them back.)
Capital: The money necessary to start and run a business. Usually through a loan or personal savings.
Widgets: Some "thing" that your business sells or uses to make the products or services that you sell.
Terms: In store Credit allowing you to pay for something after receiving it. Usually there is a discount if you pay early.
Bootstrapping: Starting a business with little or no Capital.
For simplification, lets say you are a master-negotiator and are able to secure Terms on your first shipment of Widgets with a Vendor. (In reality, many companies require a credit check or cash up front for new accounts.) Also, for simplification, let say that you are going to sell the widgets for double your costs ($5 = $10).
Step 1: The Vendor is going to extend (give) Credit to you. The Terms of the Credit will allow you 30 days to pay for the widgets. The 30 days begin on the date that the widgets are shipped from the Vendor - NOT from the date that you took delivery.
Lets say shipping took three days. You now have 27 days until you must pay for the widgets.
Step 2: Because you are smart, you have already "pre-sold" some of the widgets. So, once you have the widgets, you deliver and collect payment for the pre-sold widgets (and sold more) and begin selling all of the widgets. Your goal is to sell all of the widgets within the remaining 27 days. The sooner the better.
Step 3: Set aside ALL of the money from the first half of the widgets. Since you have doubled the selling price of the widgets, selling half of the widgets actually pays the Vendor for the whole order! Pay the Vendor early and you may get a discount and become even more profitable.
Step 4: You keep all the money from the second half of the order, or you can use this money for an even larger second order to grow your business! Repeat the above steps each month (or even more often) and next thing you know your hiring employees!
