Immediate Business Growth: Figure out the Rate-Limiting Step in Your Growth

One of the most important factors that determine the growth rate of a business is how fast it depletes its cash reserves. In business terms, this is referred to as the cash burn rate. It’s a measure of the direction in which your cash is moving, and how fast.

Startups benefit a lot from keeping track of their cash burn rate. The common practice is to use funds to generate growth for the business then aim for positive cash flow before the money is depleted.

To determine how long the cash will last while considering the burn rate, businesses use a metric known as cash runway. It determines how long it will take for the business to use the remaining cash at the current burn rate.


How to calculate cash burn rate

To get the cash burn rate for a particular period, note the starting cash balance and the ending cash balance for the period in question. Find the difference. The amount you get is the amount of money left in your cash reserve. Divide this figure by the number of months in your selected period. The resulting amount is your monthly value.

Take, for example, a startup that started with $300,000 at the beginning of the first quarter. After three months, the ending cash balance was $240,000. This means that it spent $60,000 over a period of 3 months, resulting in a cash burn rate of $20,000.


How to calculate cash runway

As mentioned earlier, the cash runway determines how long a business has until it depletes its cash reserves. To determine cash runway, we divide the ending balance by the cash burn rate.

Going back to our startup example, take the remaining $240,000 and divide it by our cash burn rate of $20,000. This gives us 12, meaning it will take 12 months for the business to use up its remaining funds at the existing burn rate.


The lower the cash burn rate, the better

How quickly are you building your cash balances? Maintaining the right balance of positive cash flow is always best. Always strive to have a negative cash burn rate. This means that you’re increasing your cash reserves and not depleting them.

82% of startups shut down due to cash flow problems. This shows that a high number of young entrepreneurs don’t take time to monitor their outgoing cash in relation to their revenues. If you’re funded, pay close attention to your burn rate. It helps to determine the business areas that need improvement.

Burn rate also helps to identify budget cuts. As a startup, if you’re experiencing a high cash burn rate, you might be overspending on certain things. Three of the most common areas that businesses spend excessively on include branding, vendor relationships, and fancy office spaces. You might just need to move to organic ways of building your brand or move back to the basement for a short while.


How to reduce your burn rate

1.   Reduce payroll expenses

Save big on payroll by postponing new hires, limiting benefits, and cutting down on nonessential workers. Ensure that all cuts are sustainable and do not put the business in a situation worse than it already is.

2.   Cut off unprofitable products

If your business offers any secondary products that don’t break even, it might be time to temporarily cut them off. Many businesses offer extra services and products just to ensure that they have a variety. These may not be worth keeping and may save the business a lot if foregone.

3.   Bill promptly

Where products and services are sold on credit, ensure that you bill them early and fast enough. Clearly define the credit terms and do follow-ups. Set up collection activities if your customers don’t pay on time. Consider putting in late-payment charges to encourage fast payments.

4.   Take on a factoring service

Invoice factoring is whereby a business sells its outstanding invoices to a factoring service for a percentage of the total amount. As the service collects the outstanding payments, it takes the money to the business minus the predetermined percentage. Such a service comes in handy when customers are not able to pay billed invoices on time.

5.   Build your revenue

Look into increasing your revenue by getting more customers and prospects, boosting traffic, raising your prices, and increasing conversion rates. Also, consider using your sales force to grow revenue by investing in properties, Pumped on Property Gold Coast is there to help you. This can be done by providing incentives for sales made to new as well as existing customers. If you sell through retailers, provide sales incentives if teams open new retail accounts.

6.   Reduce direct costs

Cutting down on direct costs can make a significant difference in your cash flows. Find ways of reducing costs related to labor, raw materials, manufacturing supplies, rate wages, and commissions. This is highly beneficial especially, for a low-margin business. 

7.   Cash Sales

Cash sales ensure that you get money in exchange for your products and services right away without waiting. The payment obligation is settled immediately. Businesses should offer a mixture of cash sales and credit terms smartly and selectively. This helps to maintain the right balance between delayed payments and cash at hand.

Cash flow in Top companies is a key driver for success. It works both ways for all types of business as it comprises both monies received and monies paid. What is of the utmost importance is that businesses maintain a positive cash flow as they strive to grow their cash reserves.


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