Speed

While “boostrapping” is admirable, it is often extremely slow. In today’s fast-moving marketplace, failure to expand fast enough can stunt the growth of your company.

Consider the following example: Let’s say your business rents a machine for $2,500 per month. The rent on the building in which the machine operates is $1,000 per month. Thus, you have fixed costs of $3,500 per month. The machine produces widgets which have material costs of $5 per widget. Each widget is sold for $10 per widget, so the profit is $5 per widget.

Currently the machine produces 1,000 widgets per month. If you sell all you produce, the gross sales revenue is $10,000 and the cost of goods totals $5,000. Thus, the gross profit is $5,000 ($10,000 minus $5,000). However, the fixed costs ($3,500) also have to be subtracted, which leaves an overall net profit of $1,500 per month.

However, this business has a problem. The material for the widgets has to be paid for in advance, and the company has only the cash to buy enough to make 1,000 widgets. But the profit margin is good. If the company could produce additional widgets, it would make a lot more money every month.