How to get a great balance sheet without the burn rate
5 June 2017
Startups spending more money than they earn is no new phenomenon. In fact this is quite common with many venture capital backed businesses. It is estimated that around 75 percent of venture-backed companies never actually manage to return cash to investors due to unsustainable burn rates. In case you’re wondering, burn rate is the amount of money a company is either spending or losing per month, gross and net respectively.
Sooner or later it becomes impossible for a startup with a high burn rate to keep raising capital, spelling the impending doom. Startup businesses would benefit greatly if their leaders paid more attention to how they spend their financial resources. Keeping close tabs on the burn rate is paramount because it is a crucial indicator for monitoring the long-term viability of an enterprise. Doing this will ensure money is not wasted on developing systems and process or acquiring and managing human capital unnecessarily.
To illustrate the point more accurately, let’s look at a few ways in which startups commonly waste money instead of taking leaner approaches to running their business operations.
Office Space
Every startup wants to make the best impression on business partners and customers. The axiom goes ‘fake it ‘til you make it’ but the downside to this type of thinking is that there’s a tendency to throw logic out the window. You don’t need a prestigious office address to be taken seriously. Humble beginnings always pay the highest dividend.
Whether you want to cultivate an air of success around your business or simply want a comfortable workspace to be productive in, it’s never worth running your business to the ground for it. Many successful entrepreneurs understand that to succeed some sacrifices have to be made. I’m sure you’re familiar with one or more stories about how such and such a star started off in a basement or tiny backroom office before growing their businesses to a point where they could comfortably afford the rent expenses. Remember, comfort always comes at a cost but it’s not worth it if all it leads to is loss. Give that a thought next time you’re thinking of getting prime office space before your business starts generate enough to cover such expenses.
The great thing about today’s sharing economy is that you can easily find affordable alternatives to fancy offices in co-working spaces. Focus on a positive revenue stream and business growth first and the cushy office will follow.
Overstaffing
Every entrepreneur dreams of creating jobs and doing their bit for the community. This is all well good but if not carefully thought through, hiring can be one of the biggest blunders startups will make since staffing is a big cash burner. If your business isn't ready to handle the overhead long-term once you receive venture capital fund backing, it’s better to keep your human resources costs to a minimal. Training and hiring can be an expensive undertaking on its own, let alone paying fixed salaries.
Instead of hiring full-time employees from the start, companies ought to try outsourcing. Recruiting freelance or virtual staff to help with those areas of your business which need the attention of expert professionals is one alternative. You can achieve this without actually spending the high sums needed to acquire and retain such talent. It’s a simple and sensible solution to the problem.
Today, even critical business functions such as finance can be outsourced. You can get a reliable virtual CFO (vCFO) who can provide all the benefits of a qualified and experienced financial officer without having to pay inflated salaries. By doing so you can ensure that your funds are better spent on growing your business instead. Whether it’s cost accounting or bookkeeping, you can outsource these tasks to a virtual accountant instead of hiring a full-time in-house bookkeeper.
Marketing
Marketing is another way in which many startups waste funds unnecessarily. It’s crucial to market your business in order to gain visibility and ultimately customers. However, many small business owners don’t have the proper understanding of what marketing initiatives work best for their business models. This results in money being spent on activities which yield no returns.
While your business is still in its initial growth phase, there is no need to run expensive marketing and/or advertising campaigns. Keeping track of campaign data and using those insights to make informed decisions about marketing spend is an essential component for achieving operational sustainability.
Your business doesn’t need complicated websites, comprehensive brochures and other custom marketing material, PR or marketing agencies for that matter. Maximum creativity and minimum spend is the key to effective marketing. That is what will truly enable your business to scale. There are many tools on the web which you can make use of for free or at a fraction of the cost for traditional marketing agency services.
Many small business fall into the trappings of following trends. Effective marketing often disregards best practices. Keeping your focus on finding the best ways to engage your customers while keeping the costs and time spent on these activities at a minimum will guarantee great savings and a reduction in the overall burn rate.
Miscellaneous Expenses
When some people think of startups, they imagine businesses with unconventional values and flexible company cultures. This may be true to a degree but there’s a thin line between a company that promotes collaboration and team building and one that has a naive leadership. For instance, many venture capital backed startups spend a great deal on social functions under the guise of doing business in a relaxed and unconventional fashion.
If your company is running the bill high on business travel expenses, office supplies, or petty expenses you have a recipe for disaster. Limited foresight and a lack of clearly defined long term goals and a vision for the business can ruin your company before it truly takes off and reaches its full potential.
To make sure your balance sheet stays healthy, you as a business owner need to be very calculated when it comes to all aspects of your business expenditure. Remember, you are in business to make money, not to spend it.
Knowing what’s important to your business and thinking outside the box in terms of how to minimize expenditure is one of the best kept secrets. Many companies that have been able to beat the odds and thrive owe much of their success to learning how to keep a good balance sheet without burning through investors’ funds.
This article is brought to you by GMAC Accounting, LLC, a full service cloud accounting and bookkeeping firm. With over 30 years of experience in the business of banking, accounting and project management, GMAC assists small and mid-sized businesses with all their financial needs. For more information on GMAC Accounting, please visit: www.GMACAccounting.com
Sooner or later it becomes impossible for a startup with a high burn rate to keep raising capital, spelling the impending doom. Startup businesses would benefit greatly if their leaders paid more attention to how they spend their financial resources. Keeping close tabs on the burn rate is paramount because it is a crucial indicator for monitoring the long-term viability of an enterprise. Doing this will ensure money is not wasted on developing systems and process or acquiring and managing human capital unnecessarily.
To illustrate the point more accurately, let’s look at a few ways in which startups commonly waste money instead of taking leaner approaches to running their business operations.
Office Space
Every startup wants to make the best impression on business partners and customers. The axiom goes ‘fake it ‘til you make it’ but the downside to this type of thinking is that there’s a tendency to throw logic out the window. You don’t need a prestigious office address to be taken seriously. Humble beginnings always pay the highest dividend.
Whether you want to cultivate an air of success around your business or simply want a comfortable workspace to be productive in, it’s never worth running your business to the ground for it. Many successful entrepreneurs understand that to succeed some sacrifices have to be made. I’m sure you’re familiar with one or more stories about how such and such a star started off in a basement or tiny backroom office before growing their businesses to a point where they could comfortably afford the rent expenses. Remember, comfort always comes at a cost but it’s not worth it if all it leads to is loss. Give that a thought next time you’re thinking of getting prime office space before your business starts generate enough to cover such expenses.
The great thing about today’s sharing economy is that you can easily find affordable alternatives to fancy offices in co-working spaces. Focus on a positive revenue stream and business growth first and the cushy office will follow.
Overstaffing
Every entrepreneur dreams of creating jobs and doing their bit for the community. This is all well good but if not carefully thought through, hiring can be one of the biggest blunders startups will make since staffing is a big cash burner. If your business isn't ready to handle the overhead long-term once you receive venture capital fund backing, it’s better to keep your human resources costs to a minimal. Training and hiring can be an expensive undertaking on its own, let alone paying fixed salaries.
Instead of hiring full-time employees from the start, companies ought to try outsourcing. Recruiting freelance or virtual staff to help with those areas of your business which need the attention of expert professionals is one alternative. You can achieve this without actually spending the high sums needed to acquire and retain such talent. It’s a simple and sensible solution to the problem.
Today, even critical business functions such as finance can be outsourced. You can get a reliable virtual CFO (vCFO) who can provide all the benefits of a qualified and experienced financial officer without having to pay inflated salaries. By doing so you can ensure that your funds are better spent on growing your business instead. Whether it’s cost accounting or bookkeeping, you can outsource these tasks to a virtual accountant instead of hiring a full-time in-house bookkeeper.
Marketing
Marketing is another way in which many startups waste funds unnecessarily. It’s crucial to market your business in order to gain visibility and ultimately customers. However, many small business owners don’t have the proper understanding of what marketing initiatives work best for their business models. This results in money being spent on activities which yield no returns.
While your business is still in its initial growth phase, there is no need to run expensive marketing and/or advertising campaigns. Keeping track of campaign data and using those insights to make informed decisions about marketing spend is an essential component for achieving operational sustainability.
Your business doesn’t need complicated websites, comprehensive brochures and other custom marketing material, PR or marketing agencies for that matter. Maximum creativity and minimum spend is the key to effective marketing. That is what will truly enable your business to scale. There are many tools on the web which you can make use of for free or at a fraction of the cost for traditional marketing agency services.
Many small business fall into the trappings of following trends. Effective marketing often disregards best practices. Keeping your focus on finding the best ways to engage your customers while keeping the costs and time spent on these activities at a minimum will guarantee great savings and a reduction in the overall burn rate.
Miscellaneous Expenses
When some people think of startups, they imagine businesses with unconventional values and flexible company cultures. This may be true to a degree but there’s a thin line between a company that promotes collaboration and team building and one that has a naive leadership. For instance, many venture capital backed startups spend a great deal on social functions under the guise of doing business in a relaxed and unconventional fashion.
If your company is running the bill high on business travel expenses, office supplies, or petty expenses you have a recipe for disaster. Limited foresight and a lack of clearly defined long term goals and a vision for the business can ruin your company before it truly takes off and reaches its full potential.
To make sure your balance sheet stays healthy, you as a business owner need to be very calculated when it comes to all aspects of your business expenditure. Remember, you are in business to make money, not to spend it.
Knowing what’s important to your business and thinking outside the box in terms of how to minimize expenditure is one of the best kept secrets. Many companies that have been able to beat the odds and thrive owe much of their success to learning how to keep a good balance sheet without burning through investors’ funds.
This article is brought to you by GMAC Accounting, LLC, a full service cloud accounting and bookkeeping firm. With over 30 years of experience in the business of banking, accounting and project management, GMAC assists small and mid-sized businesses with all their financial needs. For more information on GMAC Accounting, please visit: www.GMACAccounting.com