Are you worried about running out of cash before you even get your start-up 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 $2000 per month, you’d essentially be buying yourself more time. And time, in the land of start-ups and impatient investors, can be the most valuable commodity there is.
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 start to make a profit? Not surprisingly: investors—actual and potential—are very interested in your burn rate as well. You’ll want to keep close watch on your order book and cash-flow statement and keep a tight rein on your expenses. And, of course, you’ll want to cut 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,
An Open Mind Leads to a Closed Wallet
Essential to reducing your burn rate and running a successful start-up is the ability to be quick to pivot and abandon ideas that aren’t working. It can be oh so 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 to take an objective look at your business objectives 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 lots of cash in those 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
