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5 ways start-ups can reduce their cash burn rate

By Jesse Schwartz
Published: October 3rd, 2018

In his recent blog post, start-up mentor and investor Martin Zwilling offers entrepreneurs five tips on minimizing the cash burn rate for their companies. “Investors check your burn rate to assess your efficiency and project your remaining runway before you run out of money and into a brick wall,” writes Zwilling.

Start-ups should be proactive about managing every dollar they spend, rather than waiting until they run out of cash and desperately seeking help from investors. It takes time to raise money, and in that time founders should keep their spending as low as possible. Here are Zwilling’s five steps that start-ups can take to reduce their burn rate:

  1. Manage cash flow personally every day. “A big influx of orders may feel like success but can kill your business if you don’t have the cash to produce, deliver and wait for payment,” he writes. A successful entrepreneur will manage cash flow ruthlessly and never delegate decisions about spending.
  2. Buffer your projected resource requirements. In any start-up, mistakes will be made, and expenses will be higher than anticipated, so it’s helpful to add 20% to the estimated funding requirements when approaching investors. “They understand start-up realities,” says Zwilling. “Going back to investors for more money ahead of the plan is high in terms of credibility and leverage.”
  3. Use future cash for payments when possible. Deferring payments, stretching the payables period, and giving employees equity in lieu of higher salaries can significantly boost cash flow in the early days. “Think of these alternatives as paying interest on a loan,” writes Zwilling, “and manage them wisely.”
  4. Be a miser with contract services and facilities. Many former corporate executives fail as start-up CEOs because they expect a big office and a dream team of expensive professionals to do the work. In Zwilling’s opinion, your burn rate “can be drastically reduced by working out of your garage.”
  5. Use social media for early marketing. It can be helpful to hire a professional marketing team, but start-ups should wait until they have a steady revenue stream for that kind of an expense. After all, companies don’t need professionals to start a free blog, develop Facebook and Twitter accounts, or perform the basics of search engine optimization.

“As a rule of thumb,” Zwilling says, “your monthly burn rate should be less than 10% of your last funding raise or starting cash in the bank. For example, a software development start-up raising $250,000 from angel investors better be able to operate on $25,000 per month. This could equate to two technical founders (with a minimal salary), funding two developers for a year.”

Managing your burn rate, he adds, is a key indicator of whether or not you have what it takes to run a successful start-up. “It’s why most investors proclaim that they invest in people, more than the idea. If you adequately manage your burn rate, your start-up is much less vulnerable to flaming out before you get to that elusive break-even point.”

Source: Startup Professionals Musings

Posted under: Tech Transfer e-News

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