HOW TO MANAGE CASH BURN

Managing Cash Burn: Key to Startup Survival

Cash burn is one of the most impactful factors for any startup’s success, making careful management of it essential. Whether you’re an early-stage startup or a late-stage company, a high burn rate can drain resources quickly, leading to closure if not managed effectively.

What Is Cash Burn?

Cash burn refers to the amount of money your startup spends each month. For instance, if your monthly expenses are $10,000, your cash burn rate is $10,000. This burn rate determines your “runway,” or how long you have before funds run out. For example, with $100,000 in the bank and a burn rate of $10,000, you’d have 10 months of runway.

Why Is Cash Burn So Critical?

Your cash burn rate essentially measures your lifespan as a startup. Before running out of runway, you’ll need a new cash injection—through loans, equity funding, or non-dilutive capital like grants—or become profitable enough to sustain operations. If you can’t secure additional capital, you may face liquidation or personal liability for outstanding debts, depending on guarantees provided.

Benefits of Managing Cash Burn Proactively

Understanding and controlling your cash burn gives you more time to seek funding or negotiate better terms with investors and lenders. With a longer runway, you’ll be in a stronger position to secure financing on favorable terms, while a shorter runway shifts the power to creditors and investors, who may exploit the urgency to their advantage.

Common Threats to Cash Burn

Common causes of excessive cash burn include poor financial management, underestimating burn rate, lack of return on investments, longer-than-expected timelines to raise capital, and unexpected crises that drain resources.

How to Manage Cash Burn: Reducing Expenses

Reducing expenses is often the most effective way to manage cash burn. Here’s how:

1. Minimize Overhead Costs:

Physical office space is often unnecessary. Consider going fully remote, selling real estate, or subletting leased spaces.

2. Optimize Labor Costs:

Labor expenses are usually one of the biggest drains on cash. Consider layoffs if needed, shift to remote contractors, or consolidate roles where possible. Reducing labor costs early on can be beneficial for overall stability.

3. Reduce Inventory:

Keeping large inventory ties up cash and increases risk. Look for alternatives to reduce idle inventory, save on storage, and manage cash flow.

4. Restructure Financing:

Explore refinancing loans, transferring credit card balances, or asking for loan modifications to reduce monthly obligations.

5. Cut Unnecessary Subscriptions:

Review all subscriptions and cancel those that are not essential.

6. Negotiate for Cheaper Services:

Look for ways to reduce costs on services like phone, internet, and insurance by negotiating with providers.

Increasing Cash Flow

After minimizing expenses, the next step is to increase incoming cash flow. Here’s how:

1. Raise More Capital:

Bring in new equity capital, but do so strategically to avoid magnifying existing issues.

2. Optimize Unit Economics:

Evaluate production costs, sales cycles, and marketing ROI to improve your cost structure and ensure each sale contributes positively to your bottom line.

3. Boost Sales:

Explore low-cost marketing tactics and revisit old leads. Small changes in conversions can significantly increase revenue.

4. Request More Cash Upfront:

If you’re relying on free trials or delayed payments, consider moving to upfront payments, larger deposits, or incentives for cash transactions.

5. Add New Premium Options:

Rather than raising prices across the board, introduce premium tiers to provide additional value and boost revenue.

6. Offer Add-Ons and Upsells:

Additional services or bundled products can increase per-customer spending without raising core prices.

7. Improve Collections:

If outstanding invoices are creating cash flow issues, incentives timely payments with discounts for early settlements or penalties for late payments.

Conclusion

Effectively managing cash burn is essential for startup longevity. By carefully monitoring and optimising expenses and increasing cash flow, you can extend your runway and potentially reach profitability, ensuring stability without reliance on external funding on unfavourable terms. A proactive approach to cash burn management equips you to navigate uncertainties and sustain growth.