‘Bootstrap it as long as you can’ is one of the most important concepts business owners and entrepreneurs need to keep in mind for long-term success. And that’s because bootstrapping develops control, creativity, focus, and discipline.
When Larry Page and Sergey Brin started Google in a garage, they were one of the few Silicon Valley dot-com companies that didn’t receive venture capital and bank financing. So, they had no choice but to figure out new ways to do things. Bootstrapping became their corporate DNA.
Typically, we finance our hotels with ownership shares and bank financing, but the cost of more cooks in the kitchen can result in losing control over the operation. The less ownership you give up, the more control you will have.
Bootstrap financing really begins and ends with careful attention to management of your financial resources. Be aware of what you spend and keep your overhead low. Track every penny.
If you need to go the top-dollar route, make sure you can justify the expense with a clear ROI. Don’t choose an overly expensive office or location unless it’s truly going to pay off in increased sales. Take a look at second-hand furniture. If it works for your office, buy it. Barter for goods and services when appropriate (trade out your rooms). Buy on promotion; take advantage of better prices offered for a limited time. If you are renovating rooms, renovate half of them. Then sell the premium-level rooms for a higher rate.
Keep a close watch on operating expenses. If interest rates are high, it won’t take too many unpaid bills to wipe out your profits. At a 12-percent interest rate, carrying an unpaid $10,000 of bills will cost you $120 per month. If you run on tight margins, it’s more costly to accumulate bills than to increase production.
Cash is king
- Keep savings high. Have a nest egg for three rainy days.
- Manage your accounts payable like a hawk. Leverage the interest-free debt that is your accounts payable. Ask new vendors for 90 or 120-day payment terms, rather than the typical 30. Ask for a discount if you pay early. When we started Magnuson Hotels, we asked our largest reservation system provider for 120-day terms and it helped us tremendously.
- A key to managing accounts receivable is to incentivise customers/vendors to pay earlier. Offer discounts if needed; use shorter terms. Don’t ever let receivables go beyond 60 days without a defined payback arrangement. The further they get out, the harder it will be to rein them back in.
- Credit cards. Credit cards are a good resource for securing extra cash. AMEX has large limits and generous terms. Do not be afraid to use them when needed.
- Leasing equipment. Operating leases are a way to keep debt off your balance sheet and reduce taxes by being a P&L (expense) item.
- SBA loans critical to small entrepreneurs in hotels. They help secure the loans by giving banks gives extra security in transactions.
- Use multiple banks to protect against default. If one bank gets too conservative, have another partner who has skin in the game to help. Play them against each other.
- When you go to the bank, be organised and confident with clean books and know your business. Don’t dress too flash, but don’t dress rough either. Play the conservative yet successful game.
- Don’t ever give a banker more information than they ask for. Things can either work for you or against you.
Transparency to creditors
Be transparent and fair to your creditors. Creditors can serve as interest-free debt, and there will be times you will need extra time to pay. It is better to let them know your payment schedule. Do this by asking them buy off on your terms, and then hit the timelines. This will build trust and also help you when you need extra time again.
P&L and balance sheet management
Do not be greedy and try to cheat the IRS. Many small hotel owners will put all expenses (even personal) in their P&L. Remember your long-term goal here. Is it to sell? To get more bank financing? You will need both a profitable firm and strong balance sheet for valuation and loan partners. Balance is key in this area.
You can become tremendously successful with bootstrapping it. Just stay focussed on the basics and you can’t go wrong.