This article was originally posted here.
Are you worried about running out of cash before you even get your startup off the ground? Sure, starting and running a business can cost a pretty penny, but if you evaluate and re-evaluate your expenses—and keep a close eye on your finances—you can keep your burn rate under control.
When investors eyeball your burn rates, you want them to see that you are effectively managing your business for the long-term. Here’s how:
Calculating Your Burn Rate
The first step in reducing your burn rate is to calculate it. Your burn rate is simply how much capital you go through every month. In other words, it’s how much money you need to lay out every month just to keep your business afloat, when you’re not taking in any revenue. For example, if you started your business with $50,000, and your operating expenses are $10,000 a month, you’d need to start earning revenue by your fifth month or else you’d be sunk.
As you can see from this simple example, it’s not exactly rocket science: the slower your burn rate, the better. In other words, if you could figure out some way to decrease your monthly operating expenses by $2,000 per month, you’d essentially be buying yourself more time. And time, in the land of startups where the next round of funding or product-market fit can be hard to find, can be the most valuable commodity.
Monitoring Your Burn Rate
Staying on top of your burn rate will give you insight into your business:
- When will you run out of money?
- When will you break even?
- When will you be profitable?
Not surprisingly: investors—actual and potential—are also very interested in your burn rate. You’ll want to keep close watch on your sales pipeline and cash-flow statement and keep a tight rein on your expenses. And, of course, you’ll want to cut unnecessary costs wherever possible to keep a safe burn rate.
Outsourcing Your Way to a Lower Burn Rate
One significant way to cut costs is to be very careful in your hiring: hire only when absolutely necessary. Otherwise, rely on contract and outsourced work as much as possible. In particular, you should focus on outsourcing non-core functions like accounting, finance, human resources, and corporate governance. These are essential functions to any start-up business, but they can be expensive to bring in-house when you are just getting started.
A better choice is to outsource these functions on an as-needed basis. Whether you need day-to-day management of your finance and administrative functions, or high-level strategic support, handing this responsibility over to a company with consulting expertise, like Early Growth Financial Services, can help you to reduce your cost structure and give you the bandwidth you need to focus on your core business.
An Open Mind Leads to a Closed Wallet
Essential to reducing your burn rate and running a successful start-up is the ability to pivot quickly and abandon ideas that aren’t working. It can be very easy to get hung up on a brilliant idea. But, sometimes, no matter how brilliant the idea, you need to ditch it. Don’t start throwing good money after bad to support something that isn’t helping you to turn a profit. Once you start going down that road, it can be hard to turn around.
Instead, take a step back and take an objective look at your business goals and initiatives. Put into effect a build-measure-learn feedback loop. This will give you the scientific data you need to make important decisions about your business. Once you have your data, listen to it: keep the winners and cut loose those ideas, strategies, products, and initiatives that are holding you back.
Hold Off on Big Expenses
Avoid capital-intensive business plans or purchases as much as possible. Only invest cash into things that guarantee a good ROI. Depending on your business, this may be the raw materials to produce a better product or a hot-shot developer to take your site to another level. Once your company starts to turn a profit, you will have plenty of opportunities to be a big spender—on a new Marketing Manager, cool office furniture, and the like. For now, think “tightwad.”
In the end, reducing your burn rate is all about following the lean start-up principles to run a tight ship. Your goal is not merely to spend less money: it’s about creating and putting into practice a well-thought out process for making your business successful in the here-and-now and into the future.
The views, opinions, beliefs, conclusions, and other information expressed in this material is not given, verified, or endorsed by Square 1 Bank, a division of Pacific Western Bank. Instead, this material is solely the work of the author, and represents his views, opinions, beliefs, conclusions, and other information he wishes to present, in all cases without any manner of endorsement from or verification by Square 1 Bank, a division of Pacific Western Bank.
This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that the author believes to be reliable, but which has not been independently verified by the author or Square 1 Bank, a division of Pacific Western Bank, and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal, or other advice, nor is it to be relied on in making an investment or other decision. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to this material should be construed as a solicitation, offer, or recommendation to acquire or dispose of any investment, or to engage in any other transaction.
All material presented, unless specifically indicated otherwise, is under copyright to the author or Square 1 Bank, a division of Pacific Western Bank, and is for informational purposes only. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied, or distributed to any other party, without the prior express written permission of Square 1 Bank, a division of Pacific Western Bank or the author. All trademarks, service marks, and logos used in this material are trademarks, service marks, or registered trademarks of Square 1 Bank, a division of Pacific Western Bank.
Square 1 Bank is a division of Pacific Western Bank, member FDIC.