There is a tonne of advice out there and a load of people with opinions on what’s involved in starting and growing your business, all advice isn’t created equally, some is awesome, experience based and includes how-to advice. My plan for this blog series is to be one of the latter, based on our experience of boot strapping our business, what it’s meant in real terms for us and some insight into the lessons we have learned.
From Wikipedia: “Bootstrapping in business means starting a business without external help or capital. Such startups fund the development of their company through internal cash flow and are cautious with their expenses”.
One piece of advice I see the most conflict on is whether to pay yourself first or pay yourself last as an entrepreneur. There are pros and cons to both options, when we started up we chose as a basic principle to pay ourselves something when we can – so last – with the expectation the business will in time repay it’s debt to us as our profits grow. We do have a fun reward system in place too, if one of us sells something then we can buy a toy for the office, most of those toys are cheap and fun (keeping costs low) but it does provide Shane and I will an incentive scheme to motivate us and compete on.
The argument for paying yourself first:
Rich Dad, Poor Dad author Roberto Kiyosaki promotes a consistent theme within his books that in order to be rich you must pay yourself first, he describes this as the habit rich people practise and offers these insights in his books:
- Paying yourself first is not easy. In fact, it can be scary, especially when the bills are piling up. But you must develop the self-discipline to do it.
- Don’t get into large debt positions that you personally have to pay for. Keep your expenses low. Build up assets first. Then buy the big house or nice car. Being stuck in the Rat Race is not intelligent.
- When you come up short, let the pressure build and don’t dip into your savings or investments. Use the pressure to inspire your financial genius to come up with new ways of making more money and then pay your bills. You will have increased your financial intelligence and ability to make more money.
This Yahoo Small Business article offers further weight to the pay yourself first argument with:
- You can save money for future business efforts or for personal use
- You will work harder to increase revenues and your income
- Investors see you are committed to growing your company
I feel a whole other blog on the motivations and rewards of owning and running your own business as personally am not convinced paying yourself first would motivate an entrepreneur to work harder and increase revenues – but perhaps it does?
The argument for paying yourself last:
Hunter Walk’s VC’s perspective is an interesting read, he proffers a strong ethical basis for paying yourself fairly and last and provides insight I personally align closely with regarding growing the pie:
- Focus on paying yourself fairly but last
- Grow the pie before taking your piece. It’ll go better than seeing the pie as fixed and fighting for a disproportionate slice — and I think ultimately lead to great wealth for you if you’re any good.
In the context of taking a startup on to a funding round this article discusses the need to keep your costs and burn rate as low as possible “Within what will feel like an incredibly short, stressful period of time, the startup needs to build product, figure out the market, and get some initial traction. Every month of cash burn is valuable.”
On balance conclusion:
Bootstrapping is stressful and paying anything, let alone yourself, can be challenging at times so if this is the path you elect to take you need to be flexible and prepared to watch those banking transactions like a hawk.
Paying yourself last is personally very financially challenging especially living with personal debt. It takes fortitude to go to work everyday knowing you won’t see a financial reward for years, it also takes self control to be patient when your staff (who in our case are paid well and first) decide to have a “relaxing” work day and not deliver any value to the business (I am trying to be tactful here).
Paying yourself last can however enable greater opportunities to re-invest early to enable growth = growth of profits to pay yourself more later. It is a hard road and stressful, the key is to ensure it doesn’t go on too long.
Food for thought anyway. Happy sharing, Vic.