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Controlled Burn: Managing Your Burn Rate

moneyBurn rate is one of those metrics that startups live and die by – whether they want to or not. You may be building the most amazing product in the world, but if you’re burning money faster than you’re raising it or making it, you won’t be building anything for long. We’ve seen too many promising startups burn $100k per month until the day they realized they had only $100k left in the bank. It’s not a good situation to be in – not for the employees, not for the investors, and certainly not for the founders.

It’s unrealistic to expect most young startups to be turning a profit. Even if you are lucky enough to generate revenue early on, it’s important to reinvest those funds to help grow the business and gain market share as quickly as possible. So what’s a company to do? Two things:

  1. Keep an eye on your cash flow. Don’t wait until you’re nearly out of money before you start trying to raise more. And don’t be lulled into complacency if revenue figures do start showing up on your income statement. It doesn’t mean you can afford to take your eye off the bottom line.
  2. Control your burn rate so that your cash lasts you as long as possible. The longer your runway, the more options you have. And the beauty of it is that controlling your burn rate is within your power. Whether you’re raising money or not, whether you’re making money or not, how fast you spend your cash on hand is largely up to you.

Below are some pointers we give to startups who are trying to make the cash last:

1. Exploit organic growth options

Controlling your burn also means controlling your customer acquisition cost (CAC). Anyone can buy customer leads, but those leads can be costly. Sometimes the best way to control your CAC is to identify promising organic channels of growth and allocate at least a portion of your valuable resources toward them instead of toward pricier paid growth.

2. Invest in a bean counter

We know that startups sometimes have to cut corners, but based on the scrambled financials we’ve seen, this is not a corner we recommend cutting. A bookkeeper or accountant can sort out your financials and keep them that way, readily justifying their position. Not only will having that person give you better visibility into your company’s performance, but it will also help you make a more professional impression on potential investors.

3. Strike a balance on perks

Startups often offer perks to their employees – especially when the salaries alone aren’t much of an enticement. But it’s important not to let those perks put you out of business. While some founders may be tempted to unscrew every other light bulb in the office to save on electricity, others will be tempted to hire Snoop Dogg for the company’s launch event. Your job is to find a balance between those two extremes.

4. Outsource what makes sense

If you have a crack team of software developers, you may be tempted to save money by having that team develop an internal chat system, sales database, or file server. But every hour they spend working on that tool is an hour they aren’t spending working on the product. Nowadays, there are free or low-cost options for just about everything you need to run a business. Some are open source, some are ad-supported. Take advantage of them.

5. Make the hard decisions

If something (or someone) isn’t working out, it’s in the company’s best interest for you to change course sooner rather than later. You’ve probably heard the phrase “Fail fast, fail cheap.” Failing fast and cheap requires that you take action as soon you realize that you’re paying for something that isn’t contributing to the company’s success. Every day that you let a problem continue is just money down the drain – money that your employees and investors are counting on you to spend wisely.

It may be too soon for your startup to be cash-flow positive, and additional venture capital may not be available the moment you need it. But controlling your burn is always an option. While that figure may vary from month to month, you should always know how much you’re spending – and whether it’s the best possible use of your funds.