Cash burn rate is the rate at which a company uses up its cash reserves or cash balance. How fast are you burning through your cash reserves? Or is your cash moving the other direction, building up a healthy balance from positive cash flow. Cash burn rate is a big concern for funded startups. The typical pattern is to get funded, use that cash to build the business, and then aim to get positive cash flow before the money runs out.
This is sometimes expressed as a “cash runway”. Cash runway is how long your cash will last at your current burn rate. The same metric is useful for mature businesses too. How fast are you growing your cash reserve? Or, are you strategically investing that money to fund faster growth? Whatever your plans, be sure to keep an eye on this metric to make sure you are hitting your targets.
HOW TO CALCULATE YOUR RATE:
To determine the burn rate for a selected period, you need to find the difference between the starting and ending cash balances for a particular period. Did you lose or gain cash? Then divide that total by the number of months in the selected period. The result is a monthly value.
It’s often best to have a negative burn rate. That means you are building your cash reserves, not using them up. There are certainly cases where investing your cash in growth is a good idea though: startups, obviously, but also bootstrapped companies that are trying to grow. Just make sure you plan for that cash burn and then track your progress. If you burn through your cash reserves faster than expected, you may end up in trouble.
HOW TO REDUCE YOUR BURN RATE:
If your cash burn rate is higher than you want, the numbers to change are pretty simple. You need to increase your incoming cash, decrease your outgoing cash, or both. Here are some ideas on how to do this:
Increase your revenue – Look for ways to boost your traffic, get more prospects into your pipeline, increase your conversion or close rates, or raise your pricing. More sales should translate into more cash coming in.
Reduce your payroll expenses – For labor-intensive businesses, deferring new hires, laying off non – essential workers, or limiting benefits can lead to big savings. Make sure any cuts are smart and sustainable.
Reduce your direct costs – For low-margin businesses, finding ways to minimize raw materials and other direct costs can make a big difference in cash flows.
Reduce or defer other expenses – Take a close look at your budget. Are there expenses that aren’t contributing to your company’s success?
Ditch unprofitable revenue streams – It’s not uncommon for businesses to offer secondary products or services that don’t break even. Why work for free?
Encourage cash sales – Cash sales are great; you get the money right away instead waiting for it. Make sure to offer credit terms selectively and smartly, rather than just converting what would have been immediate transactions into delayed ones.
If you’ve done all you can to affect your incoming and outgoing cash, but your burn rate is still too high – and, crucially, you are confident that your business can be successful – you may need to do more fundraising. Be sure to do this as early in the process as possible, since a business running low on cash may strike potential lenders as too risky.
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