While love, life and liberty may be more worthwhile than gold, they aren’t when it comes to your business. If you don’t make carefully calculated financial decisions, then you don’t have a secure business future.
So let’s safeguard your finances, and talk about the easiest business tool that you can use - your burn rate calculator. We'll be covering:
- What is a burn rate?
- How to calculate my burn rate?
- What is a cash runway?
- How you can combat burn rate
What is burn rate?
Your burn rate is a calculation of your spending habits. Specifically, it’s your overall spending amounts and the speed at which you are spending it. Burn rate is your negative cash flow.
It’s called that because many new ventures and startups tend to “burn through cash” too quickly in an attempt to make it big as soon as possible. They have a high burn rate, and fail because of it.
But it’s not just a problem for startups. The burn rate of any business should be calculated and assessed regularly. It allows you to make informed business decisions for your immediate future.
How to calculate my burn rate?
It’s easy as 1, 2, 3.
Calculate your starting cash balance
Subtract your ending cash balance (usually your current cash balance)
Divide that result by the number of months your business has been operating.
(Starting cash balance - Ending cash balance) ÷ Number of months = Net Burn Rate.
Let’s take a quick example just to set your perspective.
Your company began with £20,000 in the bank. It’s been up and running for 6 months and now has £8,000 left. We put that in the burn rate calculator and it looks something like this:
(20,000 - 8,000) ÷ 6 = Burn Rate
12,000 ÷ 6 = 2,000
The burn rate of this hypothetical company is £2,000 per month. This gives the company a cash runway of four months.
What is a cash runway?
Your cash runway is essential for every startup. We all know that when a plane goes down a runway it has two options. Either it takes off and soars through the skies or… it runs out of runway.
It is exactly the same for startups.
You made a fantastic fundraising effort, but those funds will run out at some point. You have a limited time frame to ensure your business will take off and start making money otherwise you will run out of runway too.
That’s why the cash runway is a vital part of the burn rate calculator. It gives you a time frame for your immediate future.
So, how can you combat burn rate?
You can either actively combat burn rate as a startup, or enlist preventative measures to ensure it doesn’t occur. So let’s break down some of the measures you can take to combat burn rate.
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1. Don’t be wasteful
You’re an excited startup after a successful fundraising round, we get it. Unfortunately, a number of startups let it go to their heads.
You get the flashy chairs, the expensive paper and personalised coffee mugs for the office, right?
Direct costs such as this can build up quickly, especially for startups whose cash runway isn’t long. Are there a number of raw materials that you don’t need? Or maybe you can make do with the cheap versions.
For now at least. Once you’re making a profit you can buy your team matching t-shirts as often as you like!
2. Increase your revenue
Easier said than done, but it can be done.
Do you need a new marketing plan to build traffic? Perhaps one of your sales funnels needs a tweak or two. Your products or services may even be undersold and raising your prices could do the trick.
3. Perform an expense survey
The business that doesn’t know where its next dollar is coming from probably doesn’t know where its last dollar went.
Sometimes it pays off to get stuck into the nitty-gritty. Whether you do it yourself or outsource to a trained financial specialist. Every penny of your business should be accounted for so you can examine where your efforts are paying off, and where they aren’t.
4. Step sideways, not backwards
If your burn rate calculator is churning out negative numbers, some of your revenue streams aren’t doing as well as they should.
The natural reaction would be to pull them immediately to secure your immediate future, but that doesn’t mean you have to let them go to waste. Put them on hold for the moment until your business is ready for them.
Or alter those revenue streams.
Subscription services are a cost effective way to maximise financial forecasting, and they are also incredibly convenient for customers who don’t want to manually place repeat orders. They could just be the perfect fit for some of your customers, especially as the subscription service market is estimated to be worth $1.5 trillion by 2025.
5. Consider additional funding
If you’ve done everything you can to reduce wastage and increase your revenue, but your burn rate calculator is still reading negative then you may need to consider additional funding.
Your business could be just around the corner from blossoming into a successful business, but that cash runway is just a little too short. You need to find your funding.
But make sure you follow through on this option at the earliest possible moment, as potential investors may see you as a big risk.
To sum up
Reducing your burn rate is about being bold and decisive. It can’t be fixed by playing ostrich and hoping for the best, and the only one that will suffer will be your business.
Our School of Startups is here to successfully guide you and your business through your journey. With webinars, guides and advice from professionals, you can learn about potential problems before you see them coming. Just listen to the CEOs of successful startups and how they fought to become stronger.
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