There has been a lot of chatter over the last few years about how much cash startups are burning through on a monthly basis. And for good reason, as 24% of all startups fail from running out of cash. Cash can come and go in a flash, even if it seems impossible to burn through all the venture capital you’ve received. So how can startups manage their burn rate and avoid going bust so early on in their existence?While there is no single suggested burn rate for startups, the following are symptoms that your startup may be spending too much cash:
- You have less than 3-6 months’ worth of cash in the bank.
Having this amount of operating expenses in reserve will provide you with a solid cash cushion. It’ll guarantee you are able to meet all your obligations for at least the next few months. Having less than this amount in the bank should raise an immediate red flag and cause you to reassess your monthly spend to ensure you won’t run out of money.
- You’re consistently missing your targets or objectives.
Not hitting your startup’s monthly or quarterly objectives is one of the first warning signs that it’s time to check the benchmarks you’ve set. This will help you pin down exactly where your spending is not resulting in the desired goals.
Missing your targets probably means that...
- There’s no clear connection between cash outgoings and growth.
If the money you’re spending isn’t yielding tangible results, your startup could be well on its way to burning through its cash reserves in a short period of time. This makes monitoring where each dollar of your budget goes extremely important - so you can see what is working for your business and what isn’t. If you are struggling to stay on top of the cash leaving your business, these 6 tools can help you get your finances in shape.
- You’re hiring people without a demonstrated need.
Related to the previous two points, hiring too many people is an example of failing to clearly link the cash you’re spending to business growth. Before hiring an extra employee, ask yourself if there’s a real need for more manpower or if you’re merely doing it because other startups in your network are.
- Your particular business model doesn’t inform how much you spend.
One of the key reasons why there’s no universal recommended burn rate for startups is that how much money you spend on a monthly basis depends on your particular business model. SaaS startups will have a completely different monthly burn rate than startups offering consumer goods. For each business model, there will be different indicators to monitor, so spend the time figuring out which are right for your startup.
- More than 5% of your budget is going to unnecessary expenses.
If too much is being spent outside the necessities of overhead, payroll, tax, and benefits, your budget may be getting eaten up by things like subscriptions, marketing, food, office perks, or travel.
- You’re spending a disproportionate amount of cash considering market size.
Could you be spending like you’re trying to find a place in a big market when it’s really a small or niche one? Be sure to do your research beforehand to determine the actual number of people in the market looking to host their own cuddle party or send a message engraved in a potato.
- You can’t reach profitability with the money you have.
Business experts will say that it’s acceptable to pursue an aggressive growth strategy and spend cash to see results. However, it’s when money is spent inefficiently that it becomes an issue. Your startup should still be able to achieve profitability with the cash it has on hand, even if your plans change or if the market shifts.
How do you see how much runway you have left?
There are several ways to track how much cash you have left to burn. You can 1) work out a cash flow forecast in a spreadsheet and manually update it with actuals each day, or 2) use a user-friendly tool that does the updating for you straight from your accounting software, like Float.
This is a guest blog by Float Cash Flow Forecasting, an add-on for Xero. For more information visit floatapp.com. If you’re still unsure if your burn rate it too high, check out these top 10 essential (and unessential) expenses startups should avoid. Alternatively, get in touch with the team here at Generate, we'd love to help!