For bootstrappers cash flow is the most important thing to keep an eye on. You don’t have to know accounting, no need to balance books everyday but definitely keep your eye on cash going out and coming in. As long as more is coming in and less is going out you are doing very well. I have learned some accounting along the way by having discussions with our CA and while filing taxes but it has always helped that the focus was on cash position. In today’s age of e-banking a nice facility that I find useful is a daily email from our bank telling me current balance, what went out yesterday and what came in. With a 75 people company we need some more tools to manage this but when we were young bootstrappers we knew all outstanding cheques that were going to be encashed and all the cheques that we were supposed to receive. Frankly, the number used to be less than 5 for both at any point in time.
Another important thing we did was being very frugal in the initial days. We would get bolder with investment or expenses only after having having met cashflow needs for 6 months. Sometimes I think if we were too conservative. So decide the level according to your risk appetite (mine is different today than it was yesterday). But it instilled within us a culture of being careful with money and I don’t know of many companies which could grow from 5 to 75 in 2.something years without taking investment. Neev is today a completely bootstrapped company.
Receivables (money people owe to you) is also something people take for granted. Especially many people think that this should not be a problem in the high-tech industry. I would suggest: plan for the worst and pray for the best when it comes to managing cash. We were hit with the extremely low probability case of a major customer defaulting for nearly 5 months in our younger days. We did not miss payroll even once and were never late on rents/bills. Our 6 month buffer kept us in good shape and we were able to turn things around. Viable businesses can simply die, starved of cash. Assume 75% percent receivables will make it for planning purposes and that payments will be 1-2 months delayed from small customers or 3-4 months from big customers. These numbers are conservative so build your buffers when you beat targets. In India getting a bank to give you a loan or overdraft as a young company is pretty much impossible so you are on your own. In fact as you grow bigger the need to maintain large internal reserves will go down due to your better debt raising capabilities.
Life is random so a big catastrophe can hit at anytime. Be prepared and figure what big catastrophe would you be willing to prepare for. We prepared for 6 months, no revenue situation but did not prepare for earthquakes. Choose your own paranoia 
Ankit Jain said
While going through finance and accounting courses, I came across cases where companies were reporting “Profits” in accounting (GAPP) terms but had negative cash flows! This was because their booked profits for a particular period were sitting as “Account Receivables” – a positive revenue figure but doesn’t help in showing cash balance in bank. So, one may pretty much be in green but has no cash to pay for operating expenses as well as loan installment repayments. Further loans taken to cover cash deficit just compound the situation because the interest amount liability for subsequent periods is increased. This is of major concern to businesses with high capital expenditure. They monitor the ratio of cash flow to interest payable on debt on each period in order to avoid a default.
Another useful tip was to allocate some part of Account Receivables (say, 2%) towards “Provision for bad debts”. This amount gets deducted from profits and gets added to balance sheet. Think of it like a cash reserve that you cannot touch and will be useful if somebody defaults.
HimS said
A post on managing bad debts would be helpful.
What was your bad debt percentage? Did it increase as you grew? How do you keep it low?
Cashflow in practice « Bootstrap in Bangalore said
[...] 1, 2008 at 2:52 am · Filed under book Cashflow is the king is almost a guru mantra for start ups and bootstrappers. I wanted to explore this in a more [...]