Although particularly important to startups still navigating out of adolescence in the local market, the issue of cash burn is important for businesses of every size. Calculating your cash burn rate is extremely useful for forecasting where you can expect to encounter important financial milestones––both good and bad.
For those who have difficulty conceptualizing how exactly this measurement is used, think of it from an individual’s perspective. If someone was employed at a company earning enough to have extra money to put aside in savings every month, their account would slowly grow the more they work. If for some reason they lost their job (and consequently lost their regular income), they could calculate a burn rate based on daily expenses and the amount of money left in their savings account to determine how long they can live off their savings before it’s depleted.
This can be applied to the business world in terms of capital. If you’re a startup who opens the business with $100,000 of capital, you might find that your first year’s monthly expenses will total to about $10,000/month. In this example, you should count on turning a profit by the 10th month in business if you plan on keeping your doors open.
Here’s some tips for staying on top of your expenses and knowing what to expect on a monthly basis:
Cut costs where you can
If your business is burning though cash faster than you feel comfortable with, you should definitely start thinking about allocating more time and resources to reevaluating your expenses in terms of their utility to your bottom line.
Resist entering into a gamble with the clock by adding more expenses in an attempt to radically alter your brand out of anxiety. First look at your payroll and consulting situation to see if your team can be shaved down to size without sacrificing any vital arteries within your business.
Instead of changing or downsizing your company, try to simply slow it down to a manageable pace until your profits can catch up with your expenses.
Return to the essential aspects of your business strategy
With a burnout date looming in your future, some financial strategists suggest taking another look at outsourcing parts of your company that might be weighing you down in costs. Going even deeper into your expenses to compare outsourcing to internal departments is a good way to slow down your cash burn while maintaining the kinds of services you’ve always offered.
Consider profit sharing
If you’ve established a network of business partners in your area, another option to cut down on capital costs is to switch to equity or royalty payments instead of simple cash.
If large-scale development plans are increasingly being stalled due to less-than-favorable business forecasts, try to negotiate mutually beneficial payment plans through stock options and royalties over an extended period of time. Not only does this give you the luxury of eliminating huge costs all at once, but you also create an environment where others depend upon your company’s success.
Wall Street lawyer and entrepreneur Cliff Ennico laid out the recent surge in this form of B2B partnership financing for creators.com.
… in a difficult economy where most entrepreneurial companies are struggling to break even and taking longer to become profitable, lenders to growing businesses have become tired of waiting for their money. Your business is not currently showing a profit, and it will have to do so before you can legally pay any sort of dividend or distribution to your investors. That may take years. If your business grows rapidly, so will the lender’s monthly royalty payments, meaning they will get their return on investment a heck of a lot faster than they would buying stock in your company.
Although this strategy is great for smaller startups looking to get traction in their industry, it’s an option that can work for bigger companies looking to boost their capital. The only drawback for larger companies is the equity dilution that can occur if it’s spread too thin between partners.
Broaden your view of success
Without much experience in the modern business world, newcomers to business management can find themselves blind to the periphery aspects of success––namely everything besides profit. What’s more important to businesses tackling constant expense concerns is cash flow.
Your rate of cash burn should be the primary measuring tool for evaluating your cash flow. Remember that timing is one of the key aspects of managing cash flow over any length of time. If you can’t foresee sustainable growth given your current expenses and business trends, reorientation is no longer just an option. Monitor what is growing and what is contracting on a monthly basis in order to make educated adjustments to your expansion plans.
No matter what kind of business owner you are, if you’re unsure of how to monitor your earnings and expenses at the level you’d like, give us a call. Our outsourced accounting and CFO services experts can help you carve a successful future for you and your business.
Photo credit: Mike Poresky