A company must constantly make more money than it is spending to be sustainable. Managing the cash burn rate is as important as making sure you bring in enough new revenue for your business to survive. This article will provide you with some helpful tips on maintaining a company’s sustainability by managing the cash burn rate correctly.
Cash Burn Rate and Company Sustainability
Whether you are managing a startup or an established company, it is important to make sure that the business can sustain itself. These two things go hand in hand; making enough money to stay afloat and maintaining the cash burn rate. Making sure you can maintain a sustainable cash burn rate in the company will go a long way in keeping your business where it is supposed to be.
What is Cash Burn Rate?
Cash burn rate refers to the amount of money that a company spends more than its total incoming revenue. This may seem impossible for some companies, but it can be managed with time and effort. In other words, it is the negative cash flow created by a company’s day-to-day business operations that show up on its cash balance. That being said, businesses need to keep track of their rates to make sure that they can maintain their companies in the best possible way.
Types of Cash Burn Rate
There are two main types of cash burn rate that companies must be able to manage: Gross and Net burn rates that are discussed as follows:
- Gross burn rate – It is a company’s operating expenses. It’s calculated by adding up all of your business expenses, such as rent, salaries, and other overheads, and is calculated every month. It also provides information about the efficiency that is independent of sales. For gross burn rate, it is best to keep it as low as possible.
For instance, the Gross Burn rate of a company holding $10,000 cash each month and spending $20,000 in expenses is calculated by dividing up the company’s cash ($10,000) with its operating expenses ($20,000). The gross burn rate is 0.5.
- Net burn rate – It is the rate at which a company loses money. It is calculated by subtracting your operating expenses from your income. This is measured on a monthly basis. The calculation for net burn rate is dividing the cash in hand by monthly operating losses.
For example, the company having $10,000 cash in hand and monthly operating losses of $50,000 will have a net burn rate calculated by dividing its cash ($10,000) with its operating losses ($50,000). The net burn rate is 0.2.
Why do companies need to have an eye on the cash burn rate?
If a company’s cash burn rate increases beyond a certain level or if it stays at the same level for too long, the company will be in a situation where it will be unable to sustain itself any longer. A large percentage of startups fail because their rate was too high when they were still in the company’s initial stages. The key to surviving at the early stages of the company is to ensure that its cash burn rate stays low.
- Look for necessary budget cuts – One of the easiest ways to keep a business’ cash burn rate low is by making sure that you are always looking for any cuts that might be necessary. This means that you have to provide yourself with a budget and determine which items are necessary.
- To identify how much revenue is needed – Managers need to know how much revenue is needed to keep a company’s cash burn rate low. This is important because it allows you to get a better idea of how your company’s revenue should work out to maintain your company’s sustainability.
Unstable cash burn rate in the company
A company’s cash burn rate is an important part of its overall business model. It allows the company to stay afloat and allows it to bring in new revenue. This is why companies need to make sure that the cash burn rate is stable and not likely to fluctuate too much. Otherwise, it can leave you at the risk of your business going out of existence since it will not sustain itself any longer.
How does the cash burn rate affect company sustainability?
Companies need to keep track of their rates at all times because it can spell out the future of their businesses. Following are just some of the different scenarios that can occur when cash burn rate effects in company:
- Lack of funds – If your company cannot sustain itself financially, it will be in a situation where it will not have enough funds to cover any operational losses that might occur because of mismanagement or unexpected circumstances.
- Bankruptcy – In some cases, if the cash burn rate goes out of control, there is a possibility that the company might end up needing to file for bankruptcy. When this happens, it will affect all other parts of the business, possibly causing it to go out of business.
- Reduced growth – Companies that have a high cash burn rate can sometimes find themselves at the risk of losing the growth prospects in their business. Growth is important because it allows businesses to increase their revenue and more customers.
- Loss of reputation – Think about the reputation you have built for your company. There are chances that reputation will be damaged if the situation continues for too long. It can cause you to lose customers, lose your reputation, and eventually be out of business.
What is the good cash burn rate in a company?
The positive trend behind a good cash burn rate is keeping a company healthy. A good cash burn rate allows a company to be sustainable and keeps it from having any issues with its cash flow. Moreover, a good cash burn rate will allow a company to bring in the new revenue and ensure that it can stay profitable for a long period. The reason behind good cash burn is that it allows financial managers to ensure that their cash flow remains stable. A good cash burn rate will also allow a company to expand and grow larger by taking on more business or getting new customers.
What to do when the cash burn rate isn’t ideal?
Business owners need to know how to manage cash burn rate in order to keep their businesses stable. The best way for it to do this is by finding ways of reducing operating expenses, streamlining operations, and improving the efficiency of its business. Following are some tips to consider:
- Maintain accurate financial statements and review them regularly – One of the best ways to keep your company from losing its existence is by having an accurate understanding of where it stands in terms of its financial situation. You need to make sure that you are always reviewing your financial statements regularly to get an idea of where your company is at when it comes to its cash flow.
- Always track variable and fixed costs – A good way for a company to stay out of trouble when it comes to the rate is by making sure that its operating expenses stay low. The only way for this is if you are going to be able to track both your fixed and variable costs. This will allow you to get a good idea of your total operating expenses and how much money is going out each month when running your company.
- Provide accurate data to investors – Companies need to ensure that they always provide accurate information regarding their cash burn rates. If they do not, they risk giving investors bad information and being unable to monitor what is happening with their business.
- Use all your resources – The other essential thing that you need to do when managing your cash burn rate is to make sure that you are using all of the available resources. This means making sure that all employees are working effectively and efficiently, they have the resources they need to get the job done and use their time wisely.
- Always open to changes and adaptation – When running a company, it is always crucial to be open to changes and adaptations as this will allow it to keep its business going strong and prevent cash burn rates from getting out of control.
- Maintain cash reserve – The next thing that you need to pay attention to when managing your cash burn rate is by making sure that you are always keeping a good amount of cash at all times. This will be especially important if the company’s volume of projects increases because it will be an added expense. At the same time, this will allow you to keep your business running smoothly at all times.
- Don’t let your burn rate be too high – It is also important for companies to keep an eye on their burn rate as it can sometimes get too high. This will put the company at risk of having serious cash flow issues as they will not afford the necessary operational expenses.
- Focus on the main strategy – The final thing you need to do when managing your cash burn rate is to focus on your main strategy and make sure that you are running your company to accomplish this mission.
How does Eqvista help grow and manage your business activities?
It is important to remember that a good cash burn rate will allow a company to expand and grow. It will allow businesses to bring in new customers and make sure that they are staying profitable and successful at the same time. One of the reasons behind this is that it allows companies to make sure that their cash flow is stable and regularly pays for operational expenses. For expert advice, Eqvista is here to offer qualified services for your business. We offer exceptional services for companies that need to grow and manage business activities. To learn more about our valuation services and cap table management software, contact us today!