Two days ago I introduced the idea of creatively reducing costs to lower or avoid the amount of funding needed for investors and to offset a higher sales ramp-up.  Yesterday I discussed the idea of finding alternative solutions to just spending money.  Today we look at the idea of staging.

Joe wants to start a web design shop. His idea is to have four salespeople, two project managers, and ten developers in house. The project managers would also use contract labor for the overflow.  To do this he needs an office (furniture, computers, and a break room) for seventeen people.  Quick calculations show that he needs about 150 sq feet per person, and at the current rate of $12/sq ft per year in his area he would need $30,600 per year (or $2550 per month).  Furthermore, he would need $1,140,000 in sales in the first year if everyone was to make an average salary of $60,000 (keep in mind we have to take into account payroll taxes).  Assuming utilities and miscellaneous come to another $20,000, the total in the first year is $1,220,000.00.  This is a burn rate of $102,000 per month.

If Joe lands a large project, he could fund the entire company for a year or two.  Otherwise, he would need to come up with sales at this level. Four salespeople would have to do about $25,500 per month in sales.  This is actually feasible, considering that once a sales pipeline is started, the sales people could do that. The reality is that most new web shops cannot get this fast up to speed.

Instead, Joe might stage it.  First, he needs sales, project management, and production.  He can do sales and project management himself and find someone else to work with to do production.  Once he lands the first project, he brings on the programmer.  As he lands more projects he brings on more programmers and eventually moves into office space. Maybe he uses an executive suite until such time it makes sense to get his own office space. An executive suite is more expensive per square foot but the overall cost is lower and he would get assistance with answering phones, etc.

If Joe focuses entirely on sales and assuming he is a decent salesperson (which he is), he figures he could do about $200,000 in the first year (ramping up to $25,000 per month in four months, and then doing about that much).  With that amount he should hire a salesperson, and a programmer.  He could do the project management as well as lead generation. Furthermore, Joe invests his own money into himself and instead of taking $60,000 takes only $30,000 in the first year.  This leaves $33,000 for other expenses (remember payroll taxes). An executive suite setup may cost $1000 per month, which leaves another $21,000 for other expenses. This is definitely doable and Joe may be able to fund the entire company himself for the first year without having to worry about loans or investors.

The staging comes to play as Joe lands bigger jobs and more work.  Every $100,000 he plans on adding one salesperson and half a project manager.  When enough work is going out the door to warrant hiring a full time programmer they hire someone.  As they grow they stage each expansion until the point they have 16 employees and the ability to support to the sales and production of $1,220,000 per year. 

Had Joe not staged it and hired everyone at once, but each salesperson only brought in $200,000 then that would result in a shortfall of $420,000 in the first year.  If Joe does not have that money he goes out of business within 8 months.

This is also known as bootstrapping.  As you grow you expand, and you start at a point that is sustainable.   By staging his growth, Joe saves $420,000 in the first year and saves his company.