What factors affect your burn rate? You founded a business and have received some funding, or you’re self-funding your startup. Either way, that money won’t last forever.
You can determine when your startup will run out of money by calculating the burn rate.
Here are six critical factors that you can use to improve burn rate and cash flow management.
1. Sales Revenue
Obviously, more money coming in each week is likely to increase the number of operating months. But not always.
Generating more sales revenue is a long-term solution for the business’s cash flow needs. And generally speaking, more sales = lower cash burn rate.
However, early on, that’s not always true. Keep an eye on the cash outflow required to fulfill your higher sales.
For instance, selling low or negative gross margin products means increased revenue actually increases your cost of sales, which might lead to a higher burn rate. Likewise, accounting revenue recorded in the books does not always equal cash in your bank accounts.
2. Cash Flow
Early in the course of your business, you might not be profitable. Finding product/market fit can take time and be expensive.
But not thinking about cash flow is detrimental and influences your burn rate. Working to improve your cash flow is worthwhile. Even if you’re not profitable, each dollar of improved cash flow improves your company’s burn rate.
Startups can control cash outflow through a variety of strategies. For instance, leasing equipment instead of purchasing can be a good idea. Effective inventory management and stable invoicing and cash collecting procedures can also help improve cash flow.
Implementing the following procedural reforms can effectively improve your startup’s burn rate.
- Offer discounts for early payment (but consider long term profitability impacts).
- Thorough credit checks before approving credit terms
- Negotiate volume discounts with your suppliers. Better material prices can improve not only liquidity but also profitability.
- Consider raising prices. Of course, check against market demand and closely track any sales impacts.
Keep in mind that although the impact of each reform may not be significant, the collective improvements will give your liquidity a boost.
3. Return on Ad Spend (ROAS)
Pumping money into underperforming marketing/sales channels can be a massive cash drain.
On the other hand, finding channels that give a positive ROAS improves your burn rate. The net cash inflow from the higher sales outweighs the cash outflow from ad spend.
However, in bottleneck situations where cash or capacity is exceptionally tight, increasing ad spending might not be feasible regardless of ROAS. For example, driving more sales makes no sense if the production department can’t meet demand.
4. Revenue (and/or Profit) Per Employee
Per-employee KPIs are some of the most influential metrics for driving any business. The developed world has a people shortage, and the company that can add people while maintaining profit per employee wins at business (and burn rate). Even Elon Musk says that we don’t have enough people.
Different types of businesses have different human resource needs. For instance, a digital marketing agency will have more revenue/profit per employee than a traditional general store.
Steering to this KPI can help both by indicating that your staffing level matches your operational needs and by allowing you to weed out underperformers.
5. Churn
Getting a customer and keeping a customer are two very different things, and both affect your burn rate.
Reducing churn means improving your product/company’s ability to keep customers. Effective improvement strategies may include:
- Offering long term subscription-based incentives
- Proactive customer communication
- Providing excellent service.
- Appointing a customer relations manager.
It’s important to note that attracting new customers may not always be feasible. Hence, growth and survival depend on repeat business.
6. Hiring (or Lack of Hiring)
Hiring too much isn’t necessarily a huge problem (although it can be!). Often, the main issue is either not engaging the right people or not hiring quickly enough.
Imagine that the product is ready, but you only hired one product marketer. You have no sales team or customer success people. You end up with something like a dozen people creating something extraordinary and virtually no one to tell the world.
Ready to Improve Your Burn Rate?
A startup has only a limited time to start turning a profit or secure additional funding. Improving your burn rate will extend the life of your company (and, in most cases, get you closer to profitability).
Generally speaking, improving resource utilization by investing in profitable activities and growth are both steps in the right direction, giving you a higher chance of success.
Have you had an eye on your startup’s burn rate but aren’t sure where to start? Founder’s startup accounting experts can help you analyze your business and recommend practical solutions for reducing your burn rate.
Contact us today to set up a free consultation to see what’s affecting your startup’s burn rate.
