Owning a startup is one of the popular ventures in the 21st century. Entrepreneurs across the globe can perceive a minute problem and work out a novel resolution. Indisputably, the practice punches in the drive to make the solutions sophisticated.

However, at times, the drive makes the entrepreneur euphoric and turns them away from the role of a business owner. It leads to the unwelcoming failure of the venture. 

Last year, a CB Insights report elaborately covered 12 reasons startups fail, and the most glaring among them was cash burn.

Here is an analytical overview of the challenge.

Not able to understand the problem

New businesses do not turn out to be profitable from their inception. In contrast, the operational costs start consuming cash from day one. As business leaders, you have planned these expenses. However, the red flag rises when your business’ cash burn rate shoots up beyond your plan. If you ignore the deviation, you should brace for trouble.

 In most cases, entrepreneurs like you get so engrossed in developing the product prototype or drafting the service offering that you may tend to overlook the expense sheet. And that is where the flame of cash burns slowly but steadily gets the fuel to grow stronger.

 Alongside being an entrepreneur, who is enthusiastic about bringing a product to life, you have to get into the role of a business owner who takes cognisance of the practical challenges that hamper the business growth. It implies you should regularly look at the numbers that drive your business, calculate the deviation between your planned and actual expenses, check if the burn rate is within control, and if it is not, identify and seal the leakages.

 If you haven’t started, here is an easy-to-use formula to calculate your monthly cash burn:

Cash Burn = Cash at the beginning of a period – Cash at the end of the period

Duration = End date of a period – Start date of the period

Monthly Cash Burn Rate = Cash Burn/Duration

 Use the Monthly Cash Burn Rate as an indicator to find out your Cash Runway – the indicator to suggest the number of months your business has before it needs a fresh cash infusion. To calculate Cash Runway, you may use the following formula:

Cash Runway = Total Cash Reserve/Monthly Cash Burn Rate

Once you have these numbers in front of you, it becomes easy to know if your business, is on the path to healthy growth. Keeping these numbers on the back burner will inevitably result in unnecessary cash burn.

Losing Grip on the control

Cash burn in a startup is inevitable. The questions you should ask are:

• For how long?
• Under what heads?
• How much?

Unless you look into those answers and regularly get back to them, it will become difficult for you to keep track of the burn and assess whether the cash flow is progressive or stagnant.

From the friends who loaned you to make a start to angel investors to venture capitalists, everybody knows that your startup will go through a phase of negative cash flow for some time. However, as a business owner, you should ensure that the timeline must not exceed the standard of 7 years.

 In addition, when you project a negative cash flow, check that both short and long-term investments get a large share of the revenue. Thinking about the future gains, you may invest in tools and technology to make your processes and operations efficient alongside deciding to spend on marketing, including advertisements and press releases for your business.

 While you look at the spending to make your business a success over 10 years, you cannot let go of your focus on the revenue. Your daily chores should comprise tracking both the expenses and earnings. It helps you see your revenue, the proportion that you are reinvesting, and the period for reinvesting to turn your venture profitable.

 Unless you continue this as a daily grind, you will get carried away with the expenses and their outcome.

 As a result, your venture will fall into the abyss of frequent capital influx and top-up liabilities. When these two components start taking over, you may stand to lose your ownership.

 In the long run, you may have to liquidate your shares as a trade-off for additional funds or become dependent on the capital markets. Although it may sound glorified that your business has become strong enough to tap the market pulse and get money out from the coffers of the investors, the situation is not permanent.

 When your investors find value in your business during a bullish market, keep in mind they may also pull back their resources when a correction sets in and the market falls.

Supportive pull down factors

Startups must make themselves known in a market. It’s a part of their marketing SOP. Hence, it’s no wonder that when they start to earn revenue, they keep provision for their marketing. With funds flushed in from VC, the percentage of that provision increases. It helps increase brand awareness and paves the way for new customers to explore and convert.

 In parallel, the businesses also add employee welfare costs, such as paid vacations, executive class travel arrangements for business leaders, and luxury stays during business travels, to mention a few.

While both types of expenses are required, you as a business owners must not stop asking if there is a scope to spend less. You should monitor the income-expenditure statement regularly to find what expense type is  “superfluous.” It is a cold-hearted job, but it is crucial to identify and stop them. 

In the spree to gain mindshare, entrepreneurs spend funds to such an extent that they become synonymous with needless cash burn. As a result, the businesses face the brunt and, unfortunately, fold up.

Way Forward

It has to stop. How can a startup business stop burning cash? How do they prioritize cash flow without compromising on the marketing costs? How to optimise their employee welfare? And, how do maintain a healthy cash flow to help the business grow? Answers to these questions are not light. Hence I have kept the space for my following blog post to tackle them. Stay tuned for the sequel – “Build a Successful Startup with Longer Cash Runway” , and trust me, it will help step up your game.