How Can I Reduce My Burn Rate?
While poets, philosophers, and executive spiritual advisors may profess that money isn’t the whole story, cash is the ink that helps you write the tale. Indeed, keeping your money on your mind will lead to better decisions and put you on the path to establishing a secure financial future for you and your business.
There are generally two ways to strengthen your company’s financial situation: increase revenue, and reduce your burn. When times are lean, it’s even more important to be ruthless when considering your regular expenses and how to reduce them.
What is a ‘Burn Rate’?
Your burn rate is a measurement of your spend—the amount of cash you’re spending and how quickly you’re spending it. It’s usually used in the context of a new venture-backed startup focused on growth to calculate the amount of time at which profitability is reached (aka ‘financial runway’), but it’s an important metric for anyone to keep in mind when considering one’s financial projections towards economic security.
Your burn rate is a calculation of negative cash flow.
How Do I Calculate My Burn Rate?
Gross burn rate: Gross burn rate estimates how much cash you spend each month, but doesn’t take income or positive cash flow into account.
This simple analysis will tell you whether your business is self-sustaining or not. If your burn rate is a positive number, then you’re spending more money than you’re taking in. Either this is factored into your detailed runway projections, or something should probably change.
Let’s take a look at a practical example:
Say you started your year with $10,000 cash in the bank and today, 6 months later, you have $2,000 cash in your bank account.
Net burn rate = (starting cash balance - ending cash balance) ÷ number of months
Net burn rate = ($10,000 - $2,000) / 6 months
Net burn rate = $8,000 / 6 months
Net burn rate = $1,333.33 monthly burn
This business has less than two months of runway, so it’s vital to think carefully about how to cut costs or increase revenue quickly— or it will run out of money very soon.
Let’s look at some healthy practices to monitor and reduce your burn.
How to Reduce Your Burn Rate
Perform an Expense Survey
If you aren’t meticulously keeping track of your operating expenses, you should start as soon as possible. Every dollar you spend should ‘have a job,’ be cataloged into your spend management tool, and tracked to limit redundancies on services.
While there are free options available for tracking and coding every operating costs as they occur, with premium spend management tools from Brex, it’s incredibly easy to filter by department, gather insights on money you could be saving, and ensure you’re not duplicating payments on SaaS subscriptions.
Set up spend alerts so you’re always aware of when both routine and one-time expenses are charged. Consider trends and intelligent insights from your spend management tools to find new ways to scale back, or invest in smarter, more efficient options.
Saas subscriptions and other recurring costs really add up, so consider performing expense surveys monthly, if not weekly, to find ways to reduce your burn.
Focus on ROI (Return on Investment)
Just because you’ve got money in the bank doesn’t mean you should make the mistake of overspending. When cash reserves are flush, many companies make the mistake of investing in flashy equipment, or outsourcing to high-end design firms. Make sure every dollar is driving growth, or working towards your stated business goals. Calculate the expected return on your investments, and cut where appropriate.
Experiment with New Ways to Increase Sales
Explore new ways of driving sales without significantly raising marketing spend. You can upsell and cross-sell to current customers, try different pricing strategies, charge for new features, or go after an adjacent market. If you're in the early-stage of growth, it's a great time to get creative.
Look for strategies that maximize your ROI, such as cross-promotion and partnerships to share and build your customer base with complementary brands, or ways to streamline your accounts receivable processes.
Delegate Your Busywork
Ask yourself: where are you spending your least productive hours? While less quantifiable than your direct cash flow, time is money, and it’s important to make the most of your waking hours.
One way to go about this is by imagining if you only had half a day to work, what tasks would you focus on? What would you cut? Color code the tasks in your calendar by work category, and try to delegate anything that doesn’t contribute to your long-term business goals.
There are now incredible companies offering worldwide outsourcing for anything from content creation, product development, marketing and design. Consider leveraging the global network of doers to offload the busywork from your digital desk.
Alternatively: Do It Yourself
In many cases, you may not need to hire a person at all—there are more software solutions than ever that manage tasks which used to require hiring a professional. As an all-in-one finance platform, Brex offers tools that can replace an accountant, for example. Dig into your Brex spend reports, and you might come across insights about your cash flow position that can help you make better decisions about where to invest, and where to cut back.
For other tasks, a simple YouTube search may lead to the realization that some things are much easier to do than you might have thought. If a task is simple, or if it requires a skill that you might actually like to have in your own skill-set, consider watching a tutorial video or taking an online course, and getting your hands dirty. You may save some real money going DIY, and learn something doing it!
It’s never been a better time to consider reducing your office-space overhead. With more companies going semi- or even fully-remote (Brex included!), have a real look at whether going fully digital is appropriate for your business. The costs-saved may greatly outweigh the benefits of maintaining IRL meeting spaces.
Be Ruthless and Reduce that Burn
Whatever techniques you use to reduce your expenses, know that saving money is in many ways just as lucrative as making money. The future of your business relies on a secure runway to profitability, so be honest and clear about your goals and your plan to achieve them.
Learn more about how Brex tools can help you forecast your spend and plan for success.