Burn rate business tips keep control – Have you ever wondered as a startup how will you determine the health of your new business venture? If not, then you will be soon running out of the funds without any track records. This is a critical scenario for your startup as a huge part of your capital must be infused by investors who will be always eager to know how much of their invested money has been consumed and at what rate. Further, no matter what you can not escape this scenario! However, you need not fret as there is an important metrics popularly known as Burn Rate that can help you with this scenario.
Let us first try to comprehend what business Burn rate actually means and later we will help you with some tips as how to keep it in control before you run out of your treasure:
The rate at which the cash is burnt or consumed in a company is called as Burn rate. “It is actually a term used in chemistry to measure the linear combustion of a solid propellant.” It is also known as cash burn rate.
If the company had Rs 10 crore cash on Feb 1, and as on Nov 30 is left with Rs 2 crore, the burn rate of the company is Rs 8 crore/10 or Rs 80 lakh per month. That is, Rs 8 crore of cash went out of the business at the rate of Rs 80 lakh per month from the last 10 months. This is helpful to notify that at the current burn rate, the business can survive for another 2 and a half month only without any further cash infusion. This information can help the promoter take a proactive well informed decision like planning and executing the strategies well in time to turn around the tables.
Burn rate gives a quick summary of the cash balance and expense structure of the company.This might not be of much importance for an established profit making company, but is very crucial for a startup.
Gross burn vs. Net burn
The capital or cash spent during the daily operations of a business each month is simply called the the Gross burn rate. It includes the expenses like salaries, maintenance, rent and delivery charges, etc. that is incurred by a business to keep it running.
The amount of cash the business loses per month is known as the Net burn rate. Net burn rate nets any inflow the business might have.
Though, net burn rate is what is given more importance, but startups should never ignore the gross burn rate. Drastic fluctuation in profits is commonly observed in startups which can result in sudden spike in burn rate. This leads to depletion of cash in hand.
Burn rates for valuations
At the time of valuation of a company, burn rate is considered as an important metric. However, the table can turn around in any direction. The business burn rate will decline if the each month the business is able to generate more revenue than its expenses. This provides the business with more time to operate in the available cash. However, if the expenses keep increasing at a higher rate than the revenues, then the burn rate will also increase. This provides the business with less time to operate with the available cash.
As the burn rate of a startup keeps fluctuating then an analysis can not be done on a fixed burn rate and hence, in order to arrive at an average variations have to be kept in account.
This is clearly visible now that in order to venture out for funds, a company needs to bring down its burn rate through operational efficiency. An investor will first look at whether the projected revenues are higher than the burn rate or not. If the answer is Yes, then the investor might not take the risk of investing in your business and take a back foot.
Tips to keep your burn rate in control
- Keep the sales graph growing – Higher the sales growth than the burn rate, safer the business and greater the chances of gaining investment.
- Control expenses – At this stage, controlling expenses is both wise and critical step to take. It can drastically bring down the burn rate. This includes watching electricity consumption, wise use of stationery, reducing unproductive staff, etc.
- Unit economies – “Startups need to ramp up fast to reduce the fixed cost per unit. The faster the business grows, the quicker per unit fixed cost falls.”
- High creditors, less debtors – Try to manage the cash by keeping it with you as long as you can but not at the cost of upsetting the creditors. Delaying the payments while ensuring timely receivables in cash can help you keep away from running out of the cash instantly.
- Reduce inventory days – Reducing the inventory days to least can help you reduce some cost.
In business, it is important to spend money in order to make some. However, it is wiser to spend it wisely also. At the initial stages of business, the main focus of the company should be to make the optimum use of cash it has and motivate and push itself to break even at the earliest.