S7 E26 Understanding your burn rate. This metric is key to your survival as a company with Jeremy Gray

Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.” Mr. Micawber in David Copperfield (1850) Written by Charles Dickens ​ JIM SCHLECKSER the CEO of Inc. magazine’s CEO Project wrote in a 2017 article that when asked by a budding entrepreneur for three pieces of advice he replied. The first thing I told was not to run out of money. The second thing was not to run out money. And third, wait for it, was not to run out of money. Burn rate is another name for negative cash flow. When money is going out of your bank account faster than it is coming in. Its important to understand that you can be profitable but still have a negative cash flow. More businesses have failed due to lack of cash than have failed due to lack of profits – the growth to bankruptcy syndrome. Burn rate cannot be calculated from your Profit and Loss. Many uses of your cash will not appear on your P&L such as capital investments, build up in inventories and accounts receivable. Beware of confusing advice – I read this line in an article about burn rate: “Put simply, you can’t go bankrupt if you make more money than you spend”. It’s true but you do need understand what you are making and what you are spending Burn rate is your monthly outgoings. Note that many articles describe your burn rate as your monthly operating expenses This is not the whole picture – if you are buying equipment, building up inventories these need to be included in your burn rate Cash runway is your cash available divided by the burn rate, If you have $200,000 and are spending at the rate of $40,000 per month your cash runway in 5 months. At launch it would be prudent to have at least 12 months of cash runway. This will give you time to build and test your MVP – Minimum Viable Product Generate initial sales: Note if you are using a penetration strategy, initial sales may not generate much margin and require you to invest in inventories. If you are selling on credit the money may not come in until later. If you are selling on 30-day terms you can expect that payment will likely be 45 days later. You will book the sale in the month it is made but the cash may not arrive until the next or even the second month. What is an acceptable burn rate? There is no one size fits all answer. In the first half of 2019 WeWork Revenues were $1.5 Billion and expenses were $2.9 billion. Some analysts were predicting that without further funding WeWork would run out of cash by the end of the year. If boot strapping you business you have finite funds and your burn rate must match your anticipated time to breakeven cash flow. And then some! If you are being funded then your cash runway should be long enough to at least prove your MVP and generate sales If you feel you may run out of cash talk to your investors early. Are they willing to put more cash into the business? Be prepared to justify your burn rate.

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