Extending your cash burn rate
Calculating when you will run out of cash is the reverse of what you’d normally plan to do in business. The usual process is to break-even and then forecast expected profit.
But if you are an existing business suddenly facing a large unexpected drop in sales outside your control, you may find yourself in a negative cash flow situation. By working out this cash ‘burn rate’ you can calculate how many weeks or months you have to make key decisions to recover, until your cash reserves are gone.
Calculate your cash zero date
This isn’t as hard as it sounds. First add up all your existing weekly expenses from your cash flow. Then depending on your current sales level, calculate how much money you are ‘burning’ or losing each week.
Divide this weekly cash burn into the amount of cash reserves you have which provides the weeks until you run out of cash if everything remains the same. Your sense of urgency will be directed by this number. There are four ways you can extend this timeframe: reduce the burn rate, increase cash reserves, delay payments and seek more revenue streams.
1. Reduce the burn rate
Depending on how the crisis has impacted on your business, remove any expenses or costs that you can while still being able to operate. The more you can cut the better if your business is in serious danger. Some ways to do this include:
- Cutting all unnecessary costs.
- Reducing staff hours or numbers.
- Changing monthly plans to lower rates.
- Cancel unused subscriptions or switch to lower plans for services.
- Negotiate discounted lease costs with your landlord.
- Get rid of any excess stock (sell online if you can).
- Sell any unused assets.
- Closing parts of the business.
Go through your last few months of invoices and credit card statements to see what could be cut. There are probably a number of expenses in your business that you could do without and now is a perfect time to delete them.
2. Increase cash reserves
The more cash you have in reserve the longer you can ride out a dip in sales. But if the crisis looks like it will be lengthy and you know the current cash you have will run out sooner than later, then you will need to access additional funds. Traditional methods like business loans, overdrafts and adding in more of your own capital will work for a time, but it could be timely to identify other ways to increase your cash reserve balance:
- Liquidate unused assets.
- Reduce stock levels.
- Clear out obsolete raw materials.
- Crowdfund or seek external investors.
- Add more of your own funds.
- Access Government subsidies or grants.
It’s sensible to have contingencies in place to access capital if you need it, enabling your business to continue to trade when the crisis ends.
3. Delay payments
Another option to reduce the immediate cash burn rate is to delay payments to a later date. This doesn’t mitigate the fact that you still owe the money to the supplier, but it may buy you some time to recover. Examples of payments you could try and delay short-term include moving to interest only loans and asking suppliers to part-pay or pay at a later date.
4. Identify alternate revenue streams
Finally, don’t wait for others to bail you out. Remember how focused you were when you first started your business. Use this time to look for what else your business can do to weather the storm. It could be possible to move parts of your business online, joint venture with strategic partners, identify new customer segments or possibly re-invent the business and look for a new market.