February 16, 2016

What’s Your Burn Rate?

food business fireDo you know what your company’s burn rate is?  And no, I don’t mean how many times your bare skin comes in contact with hot pots and pans.  In this case, we’re talking about how quickly your business is going through, and not replenishing, cash.  As you can imagine, that’s equally as painful as burns on the skin.

Technically defined as the measurement of negative cash flow, this terminology most commonly relates to how quickly new companies are churning through money before they become profitable.   As bad as this sounds, the reality is that pretty much every new business is going to initially have more expenses than they have revenue.  That’s just part and parcel of getting a business up and running.  But it’s important that you look at how quickly you are spending money and weigh that against the financial resources you have available to you to help fund the business.

Ultimately, you want to have not only an idea of how quickly you’re running through your cash reserves, but also have spent time thinking about how your business will ramp up and at what point you expect that revenue generated from your business will, at the very least, break-even with your expenses.

There will certainly be times, as you grow your business, where you have to put more money into it in the short-term than you’re getting back out initially – that’s part of the recipe for growth – but even then you want to understand how your financial commitment now is going to impact your business in both a negative and a positive way.  By making a financial commitment to do X now, what does that mean you can’t do (and what is the associated cost with not doing that) and what do you hope to gain, financially, by doing X.

I don’t write any of this to take away from the creativity of being a food entrepreneur but because I see too many great business concepts start and fail simply because their burn rate exceeds what the entrepreneur was prepared or able to fund.  It’s worth repeating that old mantra – it will always take more time and more money to get your business started.  So prepare yourself in advance (or prepare yourself before moving to the next growth stage), by determining how much cash you have available and how long do you realistically think it will take you to break even and/or start turning a profit.

It’s worth noting, one of the best ways to predict what your burn rate is and when you’re going to break-even is with a cash flow analysis.  One of the new webinars in the Spring will be focused on how to create a cash flow analysis using excel for your business.  More information about this and the other spring webinars will be published next month.  As a reminder, webinars are limited to 25 participants and e-newsletter subscribers are given advance notice of the webinars so if you want to increase your chances of participating in this or other webinars, you can find out more about subscribing to the monthly Small Food Business e-newsletter by clicking here.

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