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Starting a New Business on a Small Budget

By Toolkit Staff | July 03, 2012

One of the toughest parts about starting a new business for many people is figuring out how best to spend a limited supply of startup money. Those who have worked for a large company may have trouble distinguishing between the luxuries they enjoyed in their old jobs from the necessities they require for their new business.

With the wisdom to make the distinction comes an understanding that you'll probably have to do more, with less, now that you're on your own. You may realize, for example, that you can't afford to have someone else water and fertilize the plants in your office. Or even have plants in your office. Or empty the trash. Or answer the phone for you when you're too busy to take a call.

Figuring out where to cut costs can be challenging. However, as Aaron Johnson and Dave Summers can tell you, it doesn't have to be an ordeal. Aaron and Dave are good friends who left jobs with two of the more prominent law firms in Kansas City, Missouri, to open a law practice together nine months ago. Having started with less than $5,000, they know firsthand what "roughing it" is all about. But they're not complaining. In fact, interviewing them for the Toolkit was a bit like talking with two scouts who have shared life in a tent together all summer and can't wait to get back to camp:

How did the two of you end up in business together?

Aaron: Ten years ago Dave and I were working together as bank examiners for the FDIC. At about that time, we both decided to go back to school to become lawyers. . .

So you were classmates in law school?

Dave: Not quite. Aaron eventually went to Washington University Law School in St. Louis and I attended the University of Kansas. But we stayed in touch all the way through school and, afterwards, when we began working for firms in Kansas City. Eventually we talked each other into starting our own practice.

What's your principal advice to Toolkit readers who may be starting their own businesses?

Aaron: Keep overhead costs to a minimum. We do everything we can to trim costs. For example, we rent a modest place. And you won't find any "battleship desks" made of genuine mahogany here. Our equipment is functional, but no one would call it fancy. Most of our stuff is secondhand.

A Spartan approach has paid off. We haven't had to sink any more money into the business beyond our original investment. We don't have any outstanding loans burdening us either.

I take it that, after a few years in the FDIC, you didn't feel like dealing with any more bankers?

Dave: Actually, we've established a pretty good working relationship with a banker. We arranged a line of credit with him before we even opened the doors on our place. We wanted to have some financial resources at our disposal if we needed them in order to handle a big case or a major client.

Aaron: This was a good thing to have straightened out ahead of time. We've got the flexibility to jump on a good thing if an opportunity to put this credit to work for us effectively occurs. However, we take great pride in the fact that, as a result of keeping our expenses low, we have never had to tap our credit. I believe this helped us to earn some respect from our banker.

Can you provide some more examples of how you trim costs?

Dave: For one thing, we don't employ any support staff. We type our own documents, mail our own letters, make our own photocopies, do our own filing. . .

Do you ever wonder whether you're using your time most effectively?

Dave: We know we're not. My former employer billed clients over $100 an hour for my time. I sometimes think about that, and what my "opportunity costs" are, as I'm labeling folders or copying lots of documents. But as a small business owner, you must realize that there's more than just "opportunity costs" in the balance; there's also a matter of cash flow. Could Aaron and I find more productive things to do with our time if we hired a legal assistant? Definitely. But we would have to pay that person every day, every week, whether or not we always had something for him or her to do. Given the drain on cash this would cause, it's just not worth it right now.

Aaron: For us, that usually means putting in a full measure of attorney work each day, then spending several hours at night handling the kinds of things that support staffers would have done if we employed some. We were prepared for the extra workload when we went into business, though. Besides, doing these chores adds variety. It's all kind of fun, really.

Dave, do you agree?

Dave: Roughing it means freedom. When you're doing it yourself, you have the freedom to make mistakes that you can learn from, and the freedom to enjoy profits from things you do right.

I think roughing it is also a lot easier if you make an effort to attract the kind of work that you find rewarding. In our case, how and where we do our work isn't as important as what we do. We're happy because we still have the opportunity to do quality work on interesting stuff that deeply affects our clients' lives. We recently prepared an appeal to the 10th Circuit from scratch. It doesn't get much more exciting than that. (He is referring to the U.S. Court of Appeals for the 10th Circuit, a federal appellate court just below the U.S. Supreme Court.)

Has "roughing it" presented any challenges?

Aaron: There's the phone. Sometimes it's hard to stop what you're doing to answer it. On the other hand, we don't feel ready to hire a full-time receptionist. We tried answering services for a time, but weren't fully satisfied with that option either. Part of the problem is that we're very particular about how we want people to be treated when they call.

We're extremely cost-conscious, but there are some things you just can't afford to skimp on. They're the things that your colleagues and your clients actually see and use to form their impressions about you. We use first-rate business cards and letterhead stationery to make a good impression. And we put quality phone service in the same category. So we've wrestled quite a bit with the issue.

Is there anything in particular that you'd do differently if you were starting your business today?

Aaron: Marketing. When we first started out, we were so swamped with work that we felt we didn't have enough time, or money, to spend on marketing. Our reputation and word-of-mouth advertising continue to provide us with more than enough work. Still, now that the business is making a profit and we have had a chance to catch our breath, we're beginning to see that we could have done more in this area.

Dave: I agree. You can never have too many work opportunities come through your doors. If you have more than you can handle, it just means you get to be more choosy about the kind of work you do.

If you have limited startup funds, the lesson from Aaron and Dave is to spend your money on those things that are most important to the success of your business: getting customers, servicing customers, keeping customers happy. If you handle those tasks well enough, there should be plenty of money available for a mahogany desk or a fancy plant later on.

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