Do you worry about the future and specifically whether you’ll have enough money to pay…
Negative Cashflow? How To Get A Handle On This
Let’s talk about negative cashflow. Possibly you’ve resigned yourself to this being an ‘on and off’ fact in your business life. It doesn’t have to be like this and there has never been a better time than now to start turning this around. The critical factor you need to consider is your burn rate. I’m not talking about calories burnt but cash burn rate. Until a few short months ago, I hadn’t even heard the term cash burn rate. So, what is it?
Cash burn rate refers to the rate at which your business uses up your cash over time. This is the rate of negative cash flow. It all comes down to your spending. Looking at your expenses in your financial statements to note how quickly (or not) you are burning through your cash. Or worse, burning through the cash before you even have it. Your expenses can increase unknowingly month by month and this can have a significant impact on your cash burn rate. Your cash burn rate is something investors look at as an indicator of the businesses’ financial fitness.
3 Tips to managing your cash burn rate
1. Uncover your expenses
Uncover and understand what every expense is and then record these to allow you to measure expenses regularly. Develop a systematic process to ensure this happens at least monthly. I use a simple spreadsheet to keep on track.
Make it a good habit to get into as expenses can change dramatically in just one month. I recommend you do these monthly comparisons so that any increases don’t go unnoticed.
By looking at this closely and comparing expenses every month it is easy to identify if you are draining cash. If so you can correct the spend before it gets out of hand.
2. Keep a close watch on small expenses
When you do notice an increase in your cash burn rate don’t panic. Stop and consider the best way forward, what expenses can I reduce? A mistake some businesses make is to cut their large expenses such as their marketing. This can have the opposite of your intended effect and just prolong the pain of negative cash flow. They stop scaling their business by cutting marketing instead of looking at the smaller spending’s they can control.
Consider supply costs for instance and outstanding payments. Focus on cash generating revenue to keep the cash burn rate down.
3. Know and understand the figures
When in start-up, running at a loss is often par for course. It is important that you measure your cashflow closely, in fact I believe it’s even more important than your net income. Monitor your cash burn rate even weekly for starters, this way you can quickly act and put some controls in place.
Really get to understand your figures. Have a look at when in the month, the various expenses are deducted. Would changing those dates help? Have a close look at the small expenses. Do you need the magazine subscription that you perhaps don’t get time to read or the industry subscription when you can access those details on-line?
When you have a close look at the small outlays you may be surprised. I know I was.
Here’s a simple illustration of cash burn
Your business has $10,000 in the bank and you earn $2,000 in revenue for the month of June. Your expenses for June are $4,000. This means your net cash position is minus $2,000 at the end of June.
Your July revenue was again $2,000 with the same expenses of $4,000. Calculating the cash burn rate there is only 3 months of cash flow left. This is your cash burn.
Whether you’re burning cash or not I suggest to take some time to look over your expenses. Just in case there is some waste happening there.
I would love to hear if you’ve uncovered any hidden expenses.
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