Do you have a handle on cash burn in your business?
Entrepreneurs and business owners have to delicately balance multiple dicey factors when it comes to their company’s finances. They have to make sure they’re making enough revenue to cover costs and turn a profit, but they also can’t skimp on spending where it’s necessary to ensure future growth.
And then there’s the factor of cash burn.
Cash burn is the rate at which a company spends its cash reserves. Whether you’ve achieved profitability or you’re still a young startup, it’s important to keep a close eye on your cash burn rate. It helps you identify sales and revenue issues earlier on and plan for a crisis should one arise.
If a company is spending its cash too quickly, it won’t have enough to keep operating and might go out of business. But if it’s too low, the company may not be able to invest in necessary growth opportunities.
At the heart of a business’ cash burn are two primary components: making more and keeping more. Let’s make sense of each.
Making More and Keeping More
Tracking and managing cash burn in your business helps you gain insights into the number of months the current cash burn can be maintained and whether your business is on track to achieve profitability.
When you understand cash to burn, you can make informed decisions about how to allocate your resources and avoid common mistakes that many entrepreneurs make. Do you need to raise more funding? Do you need to cut back on spending? Do you need to find ways to generate more revenue?
There are generally two ways to strengthen your company’s financial situation: increase revenue and reduce your burn.
Making more money is the most obvious way to keep your business afloat and reduce cash burn. If you can find ways to bring in more money, you can offset some of the money going out. This may mean expanding your customer base, increasing prices, or finding new revenue streams.
Keeping more of what you make is the second way that is especially critical during lean times. You can do this by finding ways to reduce your expenses. This may mean renegotiating contracts, cutting back on unnecessary spending, or finding cheaper ways to do things.
Both options – making and keeping more money – are essential in managing cash burn. Depending on your specific situation, one may be more important than the other.
The goal is to find a balance between making and keeping so that you can reduce your cash burn without compromising the future of your business.
Can You Manage Making More?
A savvy business owner must be able to compare their spending efficiency and see how it translates to output and goals. Is the amount of cash spent on the business activities in line with the results those activities generate?
This is where making more comes in.
If a business owner can find ways to increase revenue without increasing costs – or, even better, while decreasing costs – they will be in a much better position to manage their cash burn.
There are many ways to make more money without necessarily increasing costs:
Improve your accounts receivable (A/R) management
This is one area that many businesses struggle with. They will send out invoices but do not have a system in place to follow up on late payments.
Unpaid invoices are a big drain on cash flow as it ties up money that could be used elsewhere.
Automating your A/R process can help alleviate this problem by keeping things moving smoothly, with minimal oversight on your part. This can help you stay on top of late payments and keep cash flow moving smoothly.
Ask for referrals
You’d be surprised to know that many customers are willing to refer your business to their friends and family if they know you’re looking for new clients. So don’t be afraid to ask!
Your best customers are often in the same social circle, so getting a referral system going can be a great way to find new leads.
Analyze your marketing spend
How much are you burning on marketing, and what’s your ROI?
Do a cost-benefit analysis on your marketing and advertising campaigns to see which ones are working and which ones aren’t. You may find that you’re spending too much on certain channels that aren’t yielding enough results. Or, you may find that there are more effective ways to reach your target audience without digging dip into your cash reserves.
If you have wiggle room on your prices, raising them can help increase revenue without having to do much more work. Of course, this isn’t always possible, especially if you’re in a competitive market. You can also consider selling more higher-priced items or services.
Bundle products or services
Offering a bundle of products or services can also help increase the total revenue generated per customer. This is because customers are more likely to make a purchase when they feel like they’re getting a good deal.
Get more customers
This one is also pretty obvious. The more customers you have, the more revenue you’ll bring in. To get more customers, you can focus on marketing and advertising to reach a wider audience or work on your sales strategies to close more deals.
Generate recurring revenue
Getting customers to sign up for a subscription or some other kind of recurring service is even better. That way, you’ll have a steadier stream of income coming in, which can help offset any cash burn.
Increase frequency of purchases
If each of your customers buys from you more often, that will also help increase your overall revenue. There are a few different ways to do this, such as offering loyalty programs or discounts for repeat customers.
Keeping More of Your Cash
Sometimes, even the most well-thought-out revenue growth plans go awry. Several things can happen, leading to less revenue than expected:
A drop in demand
This can happen for a number of reasons, such as a change in the economy or a shift in customer preferences.
A change in the marketplace and competitive landscape
This can also lead to a drop in demand and increased competition. A new or existing competitor may change their pricing or offerings, impact your business.
An unexpected event
This could be anything from a natural disaster to a sudden change in the stock market. Unexpected events can have a major impact on your business, so it’s important to have a plan in place to deal with them.
If you’re still struggling with cash burn, keeping more of the money you are making can keep you afloat while you work on a plan to increase revenue.
Here are a few things you can do to keep more of your money:
Review your expenses
Take a close look at your business expenses and see if there are any areas where you can cut back. This could include things like reducing your office space, cutting marketing expenses, or negotiating better terms with suppliers.
Many businesses that budget often fail to forecast income. A forecast can help you plan your spending and keep enough liquidity in your cash reserves.
Do you have a bird’s eye view of your business financials? Are there expenses you can put off until you have more cash reserves? Having a clear financial goal for your business can help you make better spending decisions. For instance, if you are planning to buy a capital-intensive asset or hire a new employee, you might want to wait until your business has more cash.
Understand your tax situation
Are you paying too much in taxes? It might be worth speaking to a tax advisor to see if you can lower your tax bill. This could free up more cash for your business.
Have a detailed tax strategy
Burn rate typically uses the accrual principle that relies on techniques such as depreciation, capitalization, amortization, and inventory valuation. But these techniques cannot always be used for tax purposes. So, it is important to have a detailed tax strategy to ensure you are not overpaying in taxes. A professional tax planner will work with you to identify your tax nexus, determine the best entity type for your business, and develop a customized tax strategy to minimize your overall tax liability.
Ready to See if You’ll Keep More Money?
No matter what business you’re in, managing cash burn is essential to keeping your doors open and avoiding financial disaster.
Unfortunately, most business owners struggle with cash flow issues at some point. If you’re worried about your business’s cash flow, a certified CPA or tax planner such as Phillips Business Group can help make sense of your numbers, identify tax strategies to save you money, and develop a plan to improve your business’s cash flow.
Phillips Business Group has a solid 85-point process that reveals tax breaks and strategies most business owners overlook. Our 7 figure clients usually see a net tax savings of nearly $97,398 every year.
If you’re interested in learning more about how we can help your business, contact us today for a free consultation.