Act Like a Start-Up

As the majority shareholder in the business of You, Inc., it's time to stop running your empire like its a lumbering, static blue-chip stock. Think scrappy. Think small. Think start-up. Dayana Yochim offers seven small-company maneuvers that can make a big difference in your personal financial empire.

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By Dayana Yochim (TMF School)
July 18, 2002

It's time to start acting like a start-up. And, no, I'm not talking about emulating a finger-snapping, has-been dot-com subsisting on Vivarin and the dregs of venture capital.

I'm talking about a start-up like Amazon (Nasdaq: AMZN) or eBay (Nasdaq: EBAY) or Starbucks (Nasdaq: SBUX) -- companies whose dinky roots took hold and blossomed. These successful start-ups were born from passion, scraped together savings, hard work, and, admittedly, good timing. The founders of these companies were driven by a mission: to have fun, build something that would last, and increase shareholder value.

That's not so different than what any individual wants for her own finances, is it?

Instead of a coffee shop on every corner or the world's biggest garage sale, your mission is more personal -- to bolster your personal financial empire. When it comes to shareholder value, it's your retirement, your kids' education, and your status as the most beloved and generous relative that's on the line. You are the majority shareholder in the business of You, Inc. It's time to stop running your financial life like a stodgy old blue chip.

"Who me? Stodgy?" you ask. When's the last time you took a critical look at the machinations of You, Inc.? How long has it been since you reviewed your entire debt load -- including credit cards, mortgage, car loan, and monthly poker game losses -- and figured out what percentage of your income you pay interest on? Did you increase your 401(k) contributions the last time you got a raise? Are you constantly looking for ways to cut costs in your daily operations? Do you think about the return on invested capital with every purchase that you make?

Or are you idling in your financial life? Maybe you feel that you're firmly established -- at the top of your game with a reserved seat at Morton's Steak House. Like a blue chip, you may be happy with your long-standing management style and the legacy of steady growth. Your income is predictable, and nothing short of a full-out flensing would send you into ruin.

Or maybe you're living off a fat trust fund.

Managing your finances like a blue chip may sound comfortable and safe, but you can do better. When you think like a blue chip, you're not striving to build something, you're working to maintain something. When you've already got a profitable foundation, it's easy to relax and lose your hunger. A blue chip's growth is typically slower than a small company's. (Think General Motors (NYSE: GM) at 5% annualized growth for the last five years.) Blue chips typically aren't nimble and able to move with the times. And the times, as we all know, they are a-changin'.

Some big companies have caught on. Johnson & Johnson (NYSE: JNJ) lets each division operate independently ("small-ly," if you will), giving its offshoots the opportunity to take risks and achieve more rapid growth. Others are harkening to their nimble past in their marketing campaigns, trotting out grainy, black-and-white news reels from back in the day (the younger Ford reminiscing about grandpa; Hewlett-Packard's garage campaign).

But you don't have to look back generations to rekindle that fire in your company's belly. These are the formative years, regardless how long you've been calling the shots for your financial empire. By virtue of being "small" (even if you have 11 kids), you have the flexibility to refigure your inflows and outflows, margins, and one- and five-year projections.

What better time than now? Consider applying these small-company principles to your finances:

Constantly review your books. Successful start-ups study their cash flow and balance sheets more often than blue-chip companies. Start with your big budget categories -- shelter, transportation, orthodontia, and long-term savings. Set a timeframe (a month, for instance) during which you'll keep detailed records of how you spend every dime. You may be surprised at how some of your subsidiaries are frittering it away.

Keep a strong, healthy balance sheet. As a young business, you are trying to build a solid foundation. It goes without saying for individuals and fledgling companies -- debt is not becoming. Ignore bankers' rules for acceptable levels of debt. Tackle double-digit interest rates (mainly credit card debt) with a vengeance. On the plus side, try to buy assets that will appreciate in value. Things like homes and higher education have benefits that pay dividends in the long term. Cars, however, typically do not appreciate.

Set clear goals.When you're small and the world is your oyster, direction is key. Don't just float along, reacting to what life throws your way. Take some time to develop your three-, six-, and 12-month goals. Then look further into the future (five or 10 years or more) for a long-term action plan.

Be aggressive. When you are treating your finances like a start-up, you're striving to prove yourself. Put in the extra effort. That may mean cutting back on your dinners out to bulk up your emergency stash of cash. Maybe it's spending a weekend re-energizing your portfolio. Be aggressive. Because if not now, then when?

Make calculated bets. At the same time, a start-up needs to make conservative bets. For individuals, that means watching your outflows and justifying every expenditure. Make sure that every dollar that you spend is a dollar that you need to spend, and that there's a potential return attached to it.

Renegotiate: As your financial empire grows, start to renegotiate everything. Blue chips have it lucky, in that their history enables them to get better prices on goods and services (like loans). When you want to expand (buy a new home or put your kid through school), look for the best terms you can.

Stay true to your mission. Discipline and drive are hard to sustain when you've lost sight of what's important. The start-ups that work out are the ones that are passionate about their mission and let it guide them every step of the way. With every financial decision you make, do what feels right to you.

My challenge to you in the next fiscal quarter is to manage your money with the live-or-die drive of a start-up. Get to the bottom of every expense. Write a mission statement for your family. Put safety measures in place, and take some calculated risks. You, Inc., will reap big returns in no time.

Dayana Yochim's IPO has been postponed until she can find an independent auditor who can make sense of that pile of receipts on her dresser. She owns no companies mentioned in this article, as she's required to divulge by the Fool's disclosure policy.