Reduce Your Burn Rate Before You Burn-out
For startups ready to shoot off the ground, the sky is the limit, but the fuel is money. As they scale higher altitudes, it is quite possible to burn a lot of money, so much so that a crash is inevitable.
Whether we talk of early-stage or late-stage startups, adopting frugal means can prove beneficial when it comes to controlling costs. A long list of expenses catches up quickly and can reverse any progress made. Being aware of the startup’s burn rate is thus vital for entrepreneurs and should be tracked consistently.
The burn rate measures how quickly a startup is depleting its cash resources, i.e., money goes out quicker than it comes in. Of course, cash flow positivity is hard to achieve from day one, but entrepreneurs should plan the route to eventually get there to become sustainable. It is also a key metric for investors to look at before investing in the company.
Here are four ways that startups can keep a check on their burn rates.
Track Each Expense
The first step in cutting down costs is to know where the money is going. As simple as it may seem, having a proper list or sheet with your expenses and tracking them consistently can help significantly. Once you have the system in place, costs can be optimized and adjusted as and when required.
Tracking expenses will also help in prioritizing better. You will consciously think about the places you spend money on. Do you need a subscription to new software? Are more office supplies required? Do you need a big office space? All aspects will be evaluated.
Hire When Needed
As startups grow, more human resources are needed. However, early-stage startups end up roping in more people than they need and overestimate their workload. Not only does this decrease the overall efficiency but also adds unnecessary expenses in terms of salaries. It is better to have a small, high-performing team than a large one that is not working to its full potential.
Entrepreneurs should take a step back and evaluate the stage and requirements of the startup. If you are scaling up, surely you can think about investing in a marketing team. But if you are still developing your product or are yet to test it in the market, you can do without one.
More and more entrepreneurs are also moving towards remote hiring and outsourcing of tasks that are low in priority. It distributes the workload but is light on the wallet, which means a win-win situation.
Scale at the Right Pace
Startups can go through phases of sudden growth when they make more money but burn all the more. The demand suddenly shoots up, and entrepreneurs are forced to improvise and fulfill it, even if it means burning through the cash. Because there is no time to think or reflect during these times, the growth may be short-lived and damaging.
This is why startups must scale at a pace that is suited to them, where they are still in control of their expenses. Inefficiencies should be checked immediately so that they do not turn into more significant hurdles.
The team should also be given time to ramp up their performance and meet new challenges in a comfortable time frame. Scaling too fast will do more harm than good.
Test the Waters First
It is always easier to correct mistakes early-on rather than leaving them for later. Before you go all out in your efforts to sell your product or service, make sure you do proper market research and testing. If you detect issues on time, you will end up saving both time and money.
Entrepreneurs are generally suggested to first build a Minimum Viable Product (MVP) which has a basic set of features for the users to try. Based on their feedback and suggestions, changes can be made so that the product can appeal to the masses. Startups should also work closely with their early adopters and see if they can extract the intended value.
By rushing into the product launch, the risk for an early-stage startup is too high. If the product does not perform as expected or if there are serious flaws, the company will end up wasting all the money spent on marketing, advertising, etc., and burn more to resurrect itself. This double blow would be enough to put the startup out of business.
Bottomline
While expenses are inevitable for startups, they can be the biggest reason for failure in case there is a mismanagement. By adopting small tricks such as the above, they save money and cut down on the burn rate. Remember, more cash in the bank means a longer runway and stability. Thus, it is key for entrepreneurs and investors alike.
