Almost every activity in your business is tied to your burn rate. This means that if you need to lower your
cash burn rate, strategies could come from a variety of sources.
Cut or pause expenditures
What expenses aren't directly contributing to increased revenue? You may argue that although the $700 per month spent on gourmet coffee for your team goes a long way and adds value, the rock-climbing lessons probably don't.
Lower the churn rate
Even if your monthly overheads haven't increased, if your business is losing customers at an alarming pace, your revenue will suffer and your churn rate will rise. A churn rate that is out of control can be disastrous. You should understand why customers churn, provide supporting resources and make sure you’re targeting the right audience for your products.
Get rid of any extra inventory
Extra inventory is valuable, but it isn't as valuable as having the equal amount of cash. In fact, it is probably burning a hole in your budget and resources. To sell off items you don't need, consider giving sales promos or discounts.
Make use of a factoring service
Factoring is a financial service in which a company sells its accounts receivable to a third party for a reduced price. If you're having trouble getting clients to pay their bills on time, you might want to consider using a factoring service.
Slowly pay your bills
Don't pay your bills any faster than you have to unless there's a discount or some other incentive for doing so. Use the agreed upon payment conditions to keep your money for longer.
Think about consolidating your debts
Are you paying several debts at the same time? Consult your creditors about refinancing options that will result in cheaper monthly payments.
Don't make any major purchases right now
If money is scarce, that huge capital investment may have to wait. Unless it's one that is guaranteed to pay off right away.
Bill sooner and get paid sooner
When you offer customers credit, make sure to bill them quickly. If they don't pay on time, clearly state the credit terms and follow up with the appropriate collection measures. Adding late payment penalties may also encourage people to pay their bills on time.
Encourage customers to pay you with cash
Cash sales are great since you get your money immediately rather than having to wait for it. Make sure you selectively and intelligently offer credit terms, don't just change what would have been a quick transaction into a delayed one without compensating factors.
Concentrate on core competencies
Trying to be everything to everyone may be a challenge for both young and mature businesses. Pursuing every half-baked funding proposal will result in cash being stretched too far, poor performance, and a high burn rate for a low return. Return to your core strengths and focus on what matters most: Efficiency is the quickest way to put out the fire of a high cash burn rate.
Cash Burn Rate Benchmarks
If your net or monthly cash burn rate is negative, your business' costs are exceeding its revenue. However, if it's positive, it indicates that income exceeds costs. It's usually a good idea to aim for a positive net or monthly burn rate, but it's not always possible. A negative burn rate isn't always a bad thing, especially when trying to build and grow a business. At least providing you have a roadmap back to profitability quickly in a pinch.
Because growth strategies and initiatives require funds to achieve, the burn rate may be negative during high growth or early stage startup periods. It's critical to keep track of your burn rate and to know how much financial runway you have. Ensure to keep your costs as low as you possibly can. Keep in mind that your gross burn rate will always be somewhat greater than average if your business is seeking to scale. The survivability of your business will depend on keeping track of your burn rate and cash flow. As well as having the wisdom to know when to rein it in.
The cash runway refers to the period of time a company can stay in business if it doesn't raise any further funding.
A startup company may tell investors that it has enough capital to go until the end of the year. This implies they'll be able to keep operating at a loss until then. The startup would need to obtain extra funds to continue operations in the new year. They will have hit the end of their cash runway at this point. If you know the burn rate, calculating the cash runway is simple.
The cash runway formula is as follows:
Cash Runway = Total Cash ÷ Cash Burn Rate
For example, if a business has $40M in cash and spends $10M each month, it will have a cash runway of four months before going bankrupt.
To get the most out of the runway cash flow formula, keep in mind that a company's cash flow can be used in a variety of ways.
If necessary, some employers may choose to pay workers with equity options or other non-cash incentives for a limited period of time.
As a last resort, founders might use their personal financial reserves. These types of funds could also be factored into the cash runway formula.
Why runway knowledge is crucial in business
For business owners, investors, and other stakeholders, cash runway is an important KPI. It provides information on a company's profitability and shows whether or not it is overspending. When the cash runway reduces from one quarter to the next, it means the company is spending more than it is bringing in. This can motivate you to take action, whether it's increasing income or lowering costs.
While established organizations benefit from having a capital runway, startups require it even more. To track growth and profitability, investors will want to keep a careful eye on the cash runway. Businesses can assess what margins are comfortable by tracking cash runway over time. Seasonal businesses, for example, may have a shorter runway to work with during the slow season. This isn't necessarily a concern as long as it's consistent.
Using Burn Rate to Calculate Cash Runway
Take your total available cash and divide it by your burn rate to find your cash runway. For example, if you have $200k available and a $20k net burn rate, your runway is 10 months.
Although runway may vary month to month based on how much income fluctuates, it is an important metric to be aware of when running a business. If your runway is fewer than 12 months, it's typically a sign that you need to formulate a strategy. If you need to raise money, bear in mind that it might take months to raise the funds. So be aware of how much time you have to raise funds while keeping the business viable.
Factors that influence runway length include:
Fundraising can have a massive influence on your runway, providing you with more money to spend, allowing you to operate for a longer amount of time. Fundraising is a time consuming and exhausting task, but it helps many new startups to develop technology or recruit the personnel they require to expand.
If your runway is running out, now is an excellent moment to focus on collecting any past due invoices from your customers. Make sure you remain on top of client payments and that they pay you on time since this will help you expand your available cash and improve your runway.
Knowing your cash burn rate and cash runway can help you figure out how many months it will take to deplete your financial reserves, when you should start raising funds, and how much money you'll need. The combination of cash burn rate and cash runway can help you make better business decisions based on your spending patterns, goals, and cash reserves.
Alejandro Cremades is a serial entrepreneur and the author of The Art of Startup Fundraising. With a foreword by ‘Shark Tank‘ star Barbara Corcoran, and published by John Wiley & Sons, the book was named one of the best books for entrepreneurs. The book offers a step-by-step guide to today‘s way of raising money for entrepreneurs.
Most recently, Alejandro built and exited CoFoundersLab which is one of the largest communities of founders online.
Prior to CoFoundersLab, Alejandro worked as a lawyer at King & Spalding where he was involved in one of the biggest investment arbitration cases in history ($113 billion at stake).
Alejandro is an active speaker and has given guest lectures at the Wharton School of Business, Columbia Business School, and NYU Stern School of Business.