No one starts a business to fail. Yet it is a gamble: you never know whether your idea is just what the market is looking for at the minute, or if it is a delusional idea that will never catch on. This is the heart of what it means to be an entrepreneur: that willingness to take on an element of risk.
When I first committed to running a business fulltime, I knew it was going to take time before it started paying me. It is said — business requires patience.
The problem is that sometime business owners underestimate how long it could take before the venture breaks even and starts generating a return on your investment.
One of the key metrics for small businesses and start-ups is their cash burn rate. Any business requires an investment of cash, whether it be for buying stock, or equipment for operations, marketing costs, and so on.
With a few exceptions, new businesses will start by using up or burning cash through expenditure at a higher rate than they replenish it through sales. This is what is referred to as cash burn. Cash burn is ordinarily measured on a monthly basis.
Usually when you start a business, you inject a certain amount of money, which is referred to as capital. Capital may comprise owner funds and or borrowed funds. Considering how much money your business uses in a month, that is, your cash burn, and the amount of capital you have in total, you can determine your cash runway.
Cash runway is the amount of time your business has to finish up its cash resources. In essence you are saying, if I have 1,000 units of capital, and I consume 100 units per month, then I have 10 months to run out my cash reserves.
American economist Edgar Russell Fiedler said that “He who lives by the crystal ball soon learns to eat ground glass.” In other words, no one can accurately predict the future; we only make informed predictions. In this vein, no business owner can accurately predict the moment when they will break even and become cash positive (opposite of burning cash).
To reduce cash burn, you can either increase your revenues, reduce your expenditure, or do both.
Your business survival might depend on how well you stretch your capital. To extend your cash runway, you must monitor how much cash you are burning and on what. You ought to dissect your expenses to identify and eliminate those that are wasteful.
The writer is Finance and Strategy Lead at Red Beryl Consulting.
PAYE Tax Calculator
Note: The results are not exact but very close to the actual.
