Belmont University

Bootstrapping for Income and Wealth

Before Christmas I had written a couple of posts looking at the reasons that people bootstrap their businesses. Lack of money and the desire to keep control were the first two reasons I wrote about in previous posts.

Another important outcome of effective bootstrapping is that it increases the income and wealth that entrepreneurs can realize from their businesses over time. Generally business owners get paid only after all of the expenses have been covered. Therefore, the ability for an entrepreneur to receive income from the business is a function of its cash flow. Since bootstrapping can improve cash flow from the business it is a means of ensuring personal income for the entrepreneur. By improving cash flow, bootstrapping increases the amount of cash the entrepreneur can take out as personal income from the business.

Additionally, much of the wealth that an entrepreneur is able to realize from the business is based on its valuation at the time the business is sold. The value of a business is based on the expected cash flow that the buyer believes the business can generate into the future. The most common valuation method for privately owned businesses is based on a multiple of the free cash flow the business generates. The multiple is based on several factors including historic growth of the venture, strength of the industry, strategic advantages of the company, and specific industry valuation standards. The degree to which the entrepreneur is able to improve cash flow through bootstrapping techniques the higher the value that can be created for the business. Bootstrapping is therefore not only good for the health of the business, but also personally good for the entrepreneur in terms of income and wealth.


Posted by Jeff Cornwall on January 3, 2008 05:01 AM |

Comments

Bootstrapping is key to small business success. I run a children's apparel manufacturing company and we bootstrap everyday. On my blog www.CorkyNation.com I just posted the about what I call the Million Dollar Race and you'll quickly understand the need for bootstrapping. Alan

Birdied by: Alan Macomber | January 3, 2008 08:30 AM

From an entrepreneur and teacher of entrepreneurship -- my entrepreneurial mind thinks of two things in regard to bootstrapping (which is my strategy for cash flow management):

(1) Risk Management: what if I lose customers? Get sick? Get sued? I need cash to weather the storm.

(2) Opportunity protection: If I don't have cash there will be profit opportunities that I can't take advantage of. Skinflintness means I have more options to make the business successful over the long term.

In other words, I think more about day to day operations, even survival, and less about long-term valuation. If I take care of the former, every day, the latter will take care of itself.

((Former VP for Entrepreneurial Programs for an SBA-funded program in Washington, DC))

Birdied by: Susan | January 3, 2008 11:04 AM

During a credit crunch, like the one we are facing now, banks call loans and close credit lines. In each of the last four recessions, I witnessed healthy companies forced into liquidation or auction because of this singular reason. Replacement financing is time consuming during good times and a fulltime job when lending institutions are tight. A loan can be called at anytime because it can

Birdied by: G S Hart | January 5, 2008 05:45 AM

Your blog is great because it doesn't just recount all of the myths out there about entrepreneurship but tells the truth - like about bootstrapping.

Birdied by: scottashane | January 7, 2008 05:12 AM

Tap it in and Comment, Please

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