In every business, cash is King 👑
But in the startup world, cash is the entire royal court – including the Jester.
Understanding how money moves in and out of your business is crucial to survival at every stage of your growth journey, from pre-launch to when you make the Forbes List.
Two key metrics that help you stay on top of this are cash flow and burn rate. These terms are often confused – but they serve two very different functions for your business.
What is cash flow?
Cash flow tracks the movement of money in and out of your business over a specific time period. It’s an essential measure of liquidity, ensuring your business has sufficient cash to cover day-to-day expenses.
Why cash flow matters
Managing cash flow matters because it’s how you know you’ll have cash on hand when you need it. Turning a profit is fantastic but it’s important to remember that what you’ve got on the balance sheet is not what you have in the bank!
You need cash to:
- Pay for operational liquidity – often known as “keeping the lights on”
- Utilities, payroll, rent, insurance, taxes, etc.
- Be ready for investors to gauge the financial health and stability of your business
- Invest in growth and strategic initiatives
Understanding burn rate
Burn rate gauges how quickly a startup is spending (or burning through) cash reserves during the business phases where you’re not yet generating adequate revenue to cover costs.
Gross burn is the total amount a startup spends each month. Net burn reflects the total cash loss, calculated as gross burn adjusted for cash inflows.
Burn rate is incredibly important to monitor during the pre-revenue or early revenue stages as it’s used to determine your runway, or how long your company can survive before running out of cash.
It is also a key indicator watched by investors to see how efficiently you’re using your capital – a high burn rate can make it difficult to raise additional cash.
Managing cash flow and burn rate
Failing to track and control these two key metrics is all but guaranteed to come back to bite you – but it’s all too common a mistake at fast-paced startups such as SaaS companies.
Here are a few high-level tips for cash flow and burn rate management:
- Monitor both metrics regularly
- Identify key inflows and outflows
- Shorten payment cycles, reduced unnecessary expenses, and adjust payment terms to benefit your liquidity
- Stay lean during early stages as reduced spending can extend your runway
