We all like spending money, whether it’s on lavish underwear or new and freaky gadgets, however much to our dismay; if the money going out doesn’t match the money coming in, we go into debt, fall out with the bank and it all heads downhill from there.
Having a business is no different. Cash is your fuel, if you run out and find yourself stranded in the middle of the dessert, then you’re on the road to your own demise.
Although it’s fun to act like a kid in a candy store sometimes, it is crucial to know where your operating capital is going. Knowing how much fuel you have left, assures that you will get to the next station without running out of gas in the middle of the perilous desert.
Managing your startup’s “burn rate” is an essential part of day-to-day business. Your “runway”, or the length of time your startup can continue operating at your current spend level, depends on this financial figure, so keeping it under control is fundamental. If you don’t have a solid understanding of the cash inflow and outflow of your startup then you could find yourself in a pickle.
Preparing coherent and regular financial reports and projections allows you to know how much more runway you have for your startup to break even before your plane crashes into Silicon Valley.
What is burn rate and how do I work that shit out?
Good ol’ Investopedia describes it as follows:
Burn rate is usually quoted in terms of cash spent per month. For example, a burn rate of $1 million would mean the company is spending $1 million per month. When the burn rate begins to exceed forecasts, or revenue fails to meet expectations, the usual recourse is to reduce the burn rate.
How do you calculate it?
This isn’t advanced math and you don’t need an MBA to figure it out.
Burn rate = Gross profits – Operating Expenditure
Monthly turnover = €0
Monthly costs: €10,000
Burn rate: €10,000 per month
Keep your eye on the burn, it’s nasty
Let’s imagine the business in the example above has €100k of initial investment. This means their runway (assuming they don’t start generating any revenue) would be 10 months. Obviously, the minute your revenues and operating expenses change, so does the burn, which is why it’s crucial to keep an eye on it weekly/monthly.
If you don’t keep your finger on top of the entire capital system of your business, you could find yourself in times of trouble, and believe me, Mother Mary isn’t going to come to you. She’s busy elsewhere. Investors won’t be there to bail you out either and even if you are lucky enough to get them to fill your coffers, they will officially pull your pants down and give you a royal one, i.e.you won’t get a very good deal.
Damn this is hot! How can I cool this burn?
Employing people in Spain can be a costly business. Unlike its European brothers, the Spanish government requires that companies fork out a healthy sum to the Segurdiad Social for every employee, so you can expect it to cost your business in the region of 1.8 times more than the salary you are offering your employee. Taking this into consideration, there are plenty of good companies worldwide offering outsourcing for anything from content creation, development, marketing and design.
Having a good recommendation is paramount before entering into any type of outsourcing. If you haven’t already had a bad experience of your own, you’ve most likely read about one.
For certain non-essential tasks, outsourcing is a sure fire way to keep costs down. If you are happy to manage remotely then this is a great option to start with. Once things start to stabilize with the business, you can look at employing a bigger team and paying the Spanish government loads of moolah.
2. Don’t go SaaS crazy
I know it’s exciting to be a subscriber to Dropbox, Salesforce, Evernote, Zoho and Basecamp all at the same time but do you really need them all? From my previous experience, the answer to that question is NO, you do not. Maybe you think that having all of these services will make you more productive, but unless you have a huge team, utlizing more than 1 or 2 of these is overkill and their cheeky ‘freemium’ pricing models will increase your burn that little bit extra each month.
Unless you have a pretty complex sales funnel then Google Apps for business is plenty thorough enough. And that dear people, costs around €5 per month, and if you’re just starting out, you can even use the free version! Use it for your CRM, accounting, saving and sharing documents, collaborating, etc. You can always export the data or upgrade at a later time if you so require.
3. Learn how to do shit yourself
If you don’t know how to create an email account or edit a basic HTML email then get your ass on Google and figure that shit out. With the massive amount of resources available online, especially on sites such as Coursera and Udemy, it’s not hard for anyone with a slight sense of adventure to learn something new. As an entrepreneur you should have a dynamic skill set and desire to learn new things. You can’t and don’t want to be doing every single job yourself but until your business starts showing signs of light, every penny counts. Plus, knowing a little bit about everything helps you when you are able to bring on experienced employees. If you have a brief understanding of various areas, it makes you a better and more effective interviewer, communicator, and managers which will prevent you from getting effed over by potential ‘bad egg’ employees.
4. Get interns
I’m not sure about the rest of the world but in Spain, there are some highly qualified people out there who would be more than happy to have an internship at your startup. Considering the state of unemployment in Spain right now and also in many European countries, people are taking what they can get. An internship at your amazing startup is a great opportunity for talented people to build their CV and gain valuable career experience.
Interns, paid or unpaid, can be very dedicated individuals with a strong will to learn and, if they mold well with the company culture, they can possibly move into a full time position down the line. In Spain, there are a ton of MBA students who want to stick around so get them psyched about your startup and get them interned!
5. Pay great people with equity/options
A great way to keep the burn down is to pay your talented employees in stock options. Instead of forking over a (somewhat) competitive salary, your employees can also be compensated with the option to buy equity in the business. Assuming you’ve done a great job recruiting top talent and selling them on your grand master plan to conquer the world, stock options become a great vehicle to get them to (literally and figuratively) buy-in to your startup.
6. Have you heard of IKEA?
When you move into your first office, which by the way shouldn’t be ostentatious in nature nor more than you can afford, no one expects you to deck it out with custom made designer furniture, numerous billiards tables or an indoor swimming pool. Get your behind to IKEA and you will find a ton of good and cheap options that can actually look cool. The experience of actually going there will most likely make you want to die, however it’s all part of the fun of being an entrepreneur. And yes, you can build the tables yourself, you don’t need to pay someone to do it. Remember folks, we’re cost cutting!
8. Virtual meetings
Getting things done in person is great and all, and sometimes essential but all this traveling back and forth can be a costly business. Encourage your customers, potential employees or even board members to use video conferencing. You don’t need to invest thousands of euros into the brand new CISCO conferencing system (although that would be pretty damn cool), you can be frugal and use Skype.
9. Ain’t nothing like a gansgta party
Having insane and excessive parties for you and you team is not necessary. Albeit extremely fun, you can celebrate when you get to break even. Motivation is a whole other ball game and isn’t all about money or crazy wild parties. More on that later.
There are certainly a bazzilion other ways to keep your company costs down, here are a few more tips from the cheap seats in the back:
10. Don’t have office parties and certainly don’t buy Grey Goose when you do
11. Don’t buy lap dances on the company account
12. Don’t pick up the bill when you meet VC’s for lunch, just fake the offer
13. Have your employees bring their own laptops, you don’t need to be buying new computers
14. Use Groupon for “company lunches and dinners”
15. Buy second-hand bean bags
16. Don’t pay for events, do a collaboration and get the brand to pay for it
17. Don’t pay for lawyers until you have to, wing it until you need them
18. Same goes for accountants, use QuickBooks and prepare the basic taxes yourself
Now comes the fun part. You guys, yes you, need to contribute. Send us your stories and innovative ideas you have to keep that itchy burn at bay.
Burn rate via cool studio
Cisco virtual meetings