Took a slightly longer break – meanwhile Neev completed 3 years and we are redoing our website to reflect our growth.
Back to business at hand. Picking the thread from where we left it: accounting. As I had said, we will use the depreciation funda we gained to some good use. Let’s say your last years accounts were
Earning
Revenue – 100
Expense
Computers bought – 50
Salaries – 20
Profits
100 – 20 – 30% (depreciation) of 50 = 80 – 15 = 65
Tax
35% of 65 = 22.75
Cash remaining (if we started with zero)
100 – 50 – 20 – 22.75 = 7.25
As we know that cashflow is the king, so for a bootstrapper the important figure is the princely figure of 7.25 which will allow investments, sales cost, working capital needs and say that customer cheque comes in a little too late. Unfortunately for young businesses in India credit facilities suck. After 2-3 years of doing business many avenues open up but as a bootstrapper you have to just get every paisa count. The simple lesson here is that rentals are 100% expense and have nothing to depreciate.
Now being the smart bootstrapper you are, here is what you do after reading this post – rent the same computers you were going to buy which give you:
Earning
Revenue – 100
Expense
Computers rented – 15
Salaries – 20
Profits
100 – 20 – 15 = 65
Tax
35% of 65 = 22.75
Cash remaining (if we started with zero)
100 – 15 – 20 – 22.75 = 42.25
This is assuming the close to real rate of 30% of value as rental in a year. Even if rental is 50% (leaving the calculations for you) the cash remaining will come to 35.75. So you are 5 to 6 times better than what you were!
Usually for cash focussed bootstrappers, the buy vs rent argument will always end in one place. This makes even better sense for expense such as furniture with 15% depreciation. Shivajinagar in Bangalore will have lots of folks ready to give you furniture on rent.
Also, things like UPS are good candidates since in your growth phase you never know how soon you will outgrow the need and be saddled with a piece of equipment you don’t need.
Enough numbers for now, in the next post we will come back to some good old personal advise.
umang said
Hi Saurabh!
congrats for the new website.
am waiting for a post on gearing up pre-sales stuff for bootstrappers!
hope to see something on that soon.
Umang
Sudeep Bhaumick said
Nice post, am supposedly an MBA myself but obviously Finance was not my forte. interesting blog and an even more interesting post. Nice read… hoping to implement it now… thanks.
Cashflow in practice « Bootstrap in Bangalore said
[...] September 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 practical fashion. Something like the corollary that renting is a better option than buying. [...]