How to Reduce your Start-Up Burn Rate?
What is Burn Rate?
Burn Rate refers to the rate at which a company uses its resources. It is a common metric of performance and valuation for companies, including start-ups. Startups initially cannot generate revenue as they are yet building their customer base and improving their product.
Following points will help you in reducing your burnout rate:
Calculating your Burn Rate:
Calculating your burn rate is the first step in reducing the same. Burn rate is nothing but the rate showing the capital expenditure you incur in a month. In other words, it’s how much money you require in a month just to keep your business going when you are not earning any revenue.
If you start your Business with Investment Amount of INR 60 Lakhs, Your Operating Expenses is INR 10 Lakhs/month. Therefore you would required to start earning some revenue by the end of 6 months or else your will not have any amount left for the 7th month.
Now lets say, you start making some 5 Lakh/month as Income(Revenue) from month 3.
Means you have 40Lakhs(60 – 20) at the start of 3rd Month.
For month 3, You make an income of 5L and your expenses is 10L, ie. at the end of 3rd month you have 35L(40-10+5)
That means by reducing your monthly burnrate from INR 10L to INR 5L
For month 4, You make an income of 5L and your expenses is 10L, ie. at the end of 3rd month you have 30L(35-10+5)
So essentially, in 2 months you have increased your runway by 1 month.
As you can see from this simple example, it isn’t some rocket science: the slower your burn rate, the longer your business lasts.
And time, in the land of startups where the next round of funding or product-market fit can be hard to find, can be the most valuable commodity.
Monitoring your Burn Rate:
Staying on top of your burn rate will give you insight into your business:
- When do you run out of money?
- When will you will achieve break even?
- When will you be profitable?
Not surprisingly: investors—actual and potential—are also very interested in your burn rate. You’ll want to keep a close watch on your sales pipeline and cash-flow statement and keep a tight rein on your expenses. And, of course, you’ll want to cut unnecessary costs wherever possible to keep a safe burn rate.
Outsourcing some processes to reduce Burn Rate:
One of the most important way to cut costs is to hire when necessary. Or else rely on contraction and outsourcing work as much as possible. You can outsource functions like accounting, finance, human resources and corporate governance. These functions are some of the essential functions for any start-up business, but it can be expensive to hire a full-time personnel when you are just getting started.
A better choice is to outsource these functions on an as-needed basis. Whether you need day-to-day management of your finance and administrative functions or high-level strategic support, handing this responsibility over to a company with consulting expertise can help you to reduce your cost and it will give you time and resources to focus on your core business.
An open mind leads to Closed Wallet:
It is important to reduce burn rate and running a start-up successfully, one needs to have an ability to abandon ideas that aren’t working. It can be very easy to get hung up on a brilliant idea. But, sometimes, no matter how brilliant the idea, you need to ditch it. Don’t start throwing good money after bad to support something that isn’t helping you to turn a profit. Once you start going down that road, it can be hard to turn around.
Instead, take a step back and take an objective look at your business goals and initiatives. Put into effect a build-measure-learn feedback loop. This will give you the scientific data you need to make important decisions about your business. Once you have your data, listen to it: keep the winners and cut loose those ideas, strategies, products, and initiatives that are holding you back.
Avoid Big Expenses:
Avoid capital-intensive business plans or purchases as much as possible. Only invest cash into things that guarantee a good ROI. Depending on your business, this may be the raw materials to produce a better product or a hot-shot developer to take your site to another level. Once your company starts to turn a profit, you will have plenty of opportunities to be a big spender—on a new Marketing Manager, cool office furniture, and the like.
In the end, reducing your burn rate is all about following strict start-up principles to run the business. Your goal shouldn’t be just to spend less, but it should be to create and put into practice a well-planned process for making your business successful in present scenario and for future.
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- Posted on May 8, 2018
- By Leena Bhagchandani
- 0 Comments