5 Tips for College Entrepreneurs: Let Your Business Purchases Earn Their Keep
One of the biggest mistakes you can make as a bootstrapping entrepreneur is not making a distinction between “need” and “want”. When you run your own business and there’s no one to lord the budget over your head, it’s too easy to mix up the two categories - just like it’s easy to mix up personal and business funds. If you can make the distinction between “need” and “want”, it becomes much easier to bootstrap your business by “earning up” to the next purchase. This is especially important to entrepreneurs still in college, as you’re likely to have limited funds available for your business. Here are some tips to consider.
- Make a list of all the items/services that you either need or want. (Henceforth referred to as “item”.)
- Write down why you want/need each item.
- Write down the approximate cost of each item. How many hours of work would you need to do, approximately, to pay for the item?
- Determine how much revenue “investing” in each item could generate. Or is a particular item an “infrastructure must-have” that does not directly help you generate revenue?
- Determine which, if any, item must be purchased first for your business, regardless of its cost and/or the potential revenue it could generate.
At this point, if you’re set on purchasing the items on your list, you’ll have to decide what to buy first. If there’s something you need immediately for your business, by all means get it as soon as you can afford it (check for seasonal sales). If not, then the decision for first purchase lies between the item that is the least expensive or the one that will earn you revenue the soonest. For the rest of the items, the idea is that you don’t purchase the next one until your first purchase has earned you the necessary funds.
This is method is not necessarily easy to implement, but if you can manage it, you’re less likely to be in debt. It’s far too easy to buy everything on credit, but if you’re still in school, you have other costs to worry about.
The general principle behind the tips above is this:
- Option 1: Buy whatever you want whenever you feel like it, on credit, and you’re always negative financially.
- Option 2: Save 100% of the purchase cost of an item that will earn you money, buy the item, earn money, then use the earnings to buy something else. Rinse and repeat. This way, you’re always positive financially. (Although you could reduce that 100% down to 80%, if you really need an item bad. Pay mostly in cash, partly on credit.)
The diagram below illustrates this. In the first part, you’re always buying on credit, always behind. In the second, you’re always ahead.
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I think it should be added that the money you earn for investment in your bootstrap business could easily come from another related or even unrelated business. Like making enough in consulting to finance development of your first piece of software. In my case, I once invested money I had earned doing some freelance blogging. It was money I had not ever anticipated having because I had started the freelancing with the idea I could use some of the extra money I made for another side venture. The point is that you should never put yourself in debt for that bootstrap investment because debt service simply raises the break even point for your business.