No business is immune to failure.
Even those with plenty of investors can find themselves out of cash at some point. But businesses with high burn rates are certainly more likely to experience such a predicament.
A company’s burn rate is the amount of money it spends each month.
For plenty of young startups, burn rate might even be significantly higher than the amount of money being brought in each month. The startups that have plenty of venture funding can withstand that sort of lopsided cash flow for awhile. But it can’t stay that way forever.
In fact, a high burn rate is what caused virtual assistant startup Zirtual to abruptly shut down recently, despite successful multi-million dollar funding rounds within the past few months.
So, what is a business that needs to spend money in order to make money to do?
Danielle Morrill, co-founder of business information startup Mattermark, thinks that more startups should be transparent about how much they spend.
And Mattermark is leading by example. The company just published a breakdown of exactly how it spends money each month. While the money the company is bringing in isn’t enough to cover all of those expenses, which totaled $713,000 in June, Morrill thinks it’s a good place to start.
The reason such an exercise can be helpful is because it causes startup founders to not only understand where their money is going but also to be accountable for those expenditures.
There are some expenses that just can’t be avoided, or shouldn’t be if you want your company to experience rapid growth. For example, $525,000 of Mattermark’s June expenses went toward staff. But you need a team in place if you want to build a successful company quickly.
But other companies tend to take their venture funding and spend it on less essential items until they find themselves in a tricky situation. Tomasz Tunguz, a partner at Redpoint Ventures, told TechRepublic:
“Having a huge sum of money in the bank can entice founders to dramatically increasing burn rate or diffuse the company’s energy among many projects. It can be challenging to maintain the same execution discipline created by the scarcity of capital when the bank account is overflowing.”
So taking a look at those expenses each month, and even giving investors the opportunity to do the same, can help you evaluate which expenses are really helping achieve your ultimate goals. In addition, that transparency can help founders really stay on top of their financial situations so that they know the bottom line. Jonathan Lehr, a managing director at Work-Bench, an enterprise venture capital firm, told CNN:
“The most important thing for a CEO to know is ‘when am I going to run out of cash at the current burn rate?’ You can’t just say, ‘burn happened.'”
Burning Match Photo via Shutterstock