How to manage cash burn? In other words, how can you best manage cash burn as a startup founder?
Cash burn is one of the most impactful factors for a startup. This one factor will make or break you.
It may seem most pivotal for early-stage startups. Many crash and burn before long due to out-of-control burn rates.
Yet, it has equally proven to take down the largest late-stage startups, with multi-billion dollar valuations.
So, how can you best manage your burn rate? What difference can it make? How do you optimize for success?
The Ultimate Guide To Pitch Decks
- 1. What Is Cash Burn?
- 2. Why Is Cash Burn So Important?
- 3. Common Threats To Your Cash Burn
- 4. Managing Cash Burn
- 5. How To Lower Your Expenses
- 6. Eliminate Overhead On Physical Space
- 7. Reducing Labor Costs
- 8. Reduce Inventory
- 9. Restructure Financing
- 10. Cut Subscriptions
- 11. Find Cheaper Services
- 12. How To Increase Your Cash Flow
- 13. Raise Money
- 14. Improve Your Unit Economics
- 15. Increase Sales
- 16. Get More Cash Upfront
- 17. Add New Premium Pricing Tiers
- 18. Add Ons & Upsells
- 19. Collections
- 20. Summary
What Is Cash Burn?
As a startup, your burn rate is how much cash you are spending each month.
So, if you are spending $10,000 per month, then you have a $10k per month cash burn rate.
In turn, your burn rate is used to calculate your ‘runway’. Your runway is how many months you have left to live before you are completely out of money and have to close down.
For example; if you have $100k in the bank and a burn rate of $10k, then you have 10 months of runway left.
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Why Is Cash Burn So Important?
Your cash burn rate tells you your lifespan. Before your runway runs out you will need a new cash injection.
This may come from loans, equity fundraising, or non-dilutive capital like grants and awards.
Or it may be solved by turning enough profit to become self-sustaining. Along with enough discretionary net profit to continue to fuel growth and innovation, and to weather crises.
If you do not solve this before your runway runs out, then you will have to fold the business.
If this happens, then you may end up having to liquidate any remaining assets to compensate creditors and shareholders.
Or, if you gave personal guarantees, you may be exposed to the liability to personally pay back those creditors from your own personal funds.
By way of a judgment, this could be taken from your other future earnings or be attached to personal assets.
Your cash burn rate alerts you to how much time that you have before you need to close on new financing.
The more runway you have when courting potential investors and lenders, the more negotiating power you’ll have.
In turn, the better terms you should be able to secure.
The shorter your runway, the more power others will have in negotiating additional credit and capital.
Don’t be surprised if they use this to their advantage and run down the clock on you on purpose.
So, start well ahead of your needs and the timeframe you expect it to take to close on new funds.
Note that this also applies in M&A, and when selling your business.
Knowing your burn rate is also a measurement of how much money you need to raise.
Be sure that your projected cash burn includes any new expenses, including taxes, inflation, and additional salaries.
Also factor in investments needed to get to your next milestones or an exit, and to be able to qualify for more money.
Mastering how to manage cash burn is all about survival, and maintaining the ability to thrive.
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Common Threats To Your Cash Burn
Things often go wrong due to:
- Poor financial management
- Underestimating cash burn
- Not seeing results from investments made
- Underestimating the time required to raise more money
- Crises and changes eat up more cash than expected
- There is a stall in expected incoming cash
Managing Cash Burn
There may often come a time when you have to work on your cash burn.
You may find yourself in a financial crunch. You may need to expand your runway.
You may need to quickly become profitable if raising another round, selling your business, or getting a loan becomes out of reach.
There are two main parts to the cash burn equation:
- How much you are spending
- How much cash you are bringing in
How To Lower Your Expenses
Reducing spending and lowering your expenses can often be the easiest and surest way to improve your burn rate, and slow or stop the bleed.
Fortunately, there are a variety of ways to do this. And, learning how to manage cash burn is the first step.
Eliminate Overhead On Physical Space
You don’t need an office. You don’t need to pay for retail space. In fact, it is going to be very, very rare that you need your own dedicated premises of any kind today.
Sell any real estate assets you have. If there are profits from this sale, it can be used to recapitalize and extend your runway.
If you have leases, find a way to get out of them. Even if that means subletting to someone else. Or you may be able to negotiate any early buyout.
Reducing Labor Costs
Labor overhead is often one of the biggest drains on startups. Layoffs are one of the most obvious solutions to this. You may have to make very serious cuts.
Just be careful where you are cutting. If you cut off your ability to bring in cash, like reducing your marketing budget, you may just be compounding your problems instead.
Don’t hesitate to make layoffs early when obviously needed. It will be better for everyone.
Though being transparent with your staff may also yield some surprisingly creative results you may not have thought of yet.
One of the easy shifts to make here without closing down vital departments or activities is to switch from salaried in-house employees to outsourced independent remote contractors.
You’ll even find that you can pay more by the hour for even better quality talent, with a less real cost.
You won’t have to pay for their equipment, insurance, benefits, travel, workspace, or to factor in the liability of on-premises staffing.
You may also consolidate positions.
Unless you are a very late stage start, with hundreds of millions in revenues, chances are for example that you don’t need a PR agency.
And you don’t need social media agency, marketing manager, copywriter, and SEO person.
This may all be done by one person far more efficiently.
Inventory on hand is often more of an expense, drain on cash and liability.
Look for alternatives to keeping inventory on hand and shouldering the financial burden of that investment sitting there idle. And the holding and insurance costs on that.
As well as the lack of return and cash flowing, and the risk of it devaluing. Work how to reduce inventory when figuring out how to manage cash burn.
Reducing your monthly outlay and debt service can improve your burn rate.
This may or may not increase your total cost of credit, but without a longer runway, you may not survive that long anyway.
Consider refinancing loans, transferring credit card balances for deals, asking for loan modifications, and canceling leases and plans you can live without.
Many startups are still trying to jump on the subscription everything bandwagon.
However, it’s possible that many individual and corporate consumers are already maxed on subscriptions.
There are probably many recurring subscription payments hitting your accounts each month that you don’t need or use anymore.
Take a few minutes to take care of all this at once, and shed the burn.
If you really need something, you may find you are offered better deals to come back as a customer. Or at least freeze or downgrade your subscription.
Find Cheaper Services
Look for better deals or negotiate for cheaper rates on all of your services, with all of your vendors.
You might be surprised at the deals you can get if you just ask.
You are probably overpaying for phone and internet services. What about insurance? Hosting?
Would you like more detailed information about what is cash burn rate? Check out this video I have created explaining nuances that your sure to find helpful.
How To Increase Your Cash Flow
Once you have reduced your spending and expenses as much as possible, without crippling your business, then you have to work on increasing your incoming cash flow.
Specifically, the amount of discretionary income and profit that creates more surplus each month.
There are also many ways to achieve this.
The most obvious solution may be to raise more money. Bring in new equity capital that doesn’t require monthly repayments.
Of course, this needs to be done in tandem with improving your overall financial dynamics.
Otherwise, it is just going to amplify the problem and or delay the inevitable. Knowing how to manage cash burn will help you resolve financial issues.
Improve Your Unit Economics
The downfall of many startups here is that their unit economics just don’t work, or are too thin.
Consider how you can operate more efficiently, shorten the sales cycle, get better returns on your marketing, and reduce production costs.
If your unit economics are sound, then increasing sales should give you more cash profits, and shrink any negative burn.
This alone can get you to be profitable and self-sustainable. It often has to compound benefits that can put you on an upward spiral.
In addition to any paid advertising you have been doing, consider any free or low-cost methods you can augment this with.
This may be guerilla marketing tactics, repurposing content to get more juice out of it, or collaborations with others.
This may also be a smart time to go back to old leads and work them again. Or work on your conversion optimization.
A few tweaks can make a huge difference between visits, views, clicks, leads, and closed sales.
Get More Cash Upfront
If you have been running on free trials, customer financing, long invoicing periods, or other customer credit and delayed payment features, it could be time to change that.
Simply getting paid more upfront could be the game-changer you’ve been needing to solve or stave off cash burn issues.
Ask for larger deposits, bigger down payments, or offer discounts for all cash transactions.
Even offering these options could boost your finances, and future, without shutting off those customers with less upfront cash.
Add New Premium Pricing Tiers
One mistake that startups and public companies make in this position is just to raise prices.
This often turns off their most loyal customers and fans and ends up being the beginning of the end.
Instead, consider adding a higher-priced premium option. Perhaps with superior service and more support. Pile in more value.
Add Ons & Upsells
Another solution is to create or repurpose add-ons and upgrades or to create bundles.
Again, be wary not to strip away what customers already expect and to reduce value, while raising prices.
Instead, focus on what extra value, services, and products you can provide, for a reasonable increase in total revenues.
This achieves an increase per customer spend, further supporting stronger unit economics and marketing ROI.
Perhaps your cash burn is due to account receivables. Do remember that you want to give others the grace that you will hope to get from your own creditors and vendors.
Though, there are ways to motivate faster payment of invoices. This may be discounts for early payment or settling large bills, or late fees and penalties for those who are late.
Not knowing how to manage cash burn can be one of the biggest threats to your startup, and everything attached to it.
Fortunately, there are many ways to optimize your cash burn, increase profitability, and extend your runway.
Or even to turn profitable and become self-sustaining, so that you aren’t under extreme pressure to raise capital, borrow or exit on someone else’ terms and timeline.
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