You have taken the plunge, setup shop and got your first customer. You realize that it has been a while since you looked at your finances. So you call in your accountant, have a chai and both of you do a bit of excel sheeting and you realize you are running out of cash. Well ... don't panic. I still have to hear of a startup that has not faced cash challenges in its intial days. Bill Gates in one of his books says he decided that Microsoft, while being super-aggressive in the market, had to be ultra-conservative with finance when he realized in their second year of operation that they were running out of cash. Even the emperors of the universe face cash problems ... Lehman Brothers for instance.
To ensure you do not run out of cash you need to do two things
-- Bring in orders - as fast as you can
-- Manage your burn
While "Bring In Orders" is obvious and everybody inuitively understands it, managing burn is a challenge. Most times because startups don't know what their burn is. So a few words of wisdom on burn ...
To run a company you have to spend money. The typical startup spends on salaries, rent, electricity/water, phone, internet, travel etc. These are recurring monthly bills , and you pay up, whether you bring in revenues or not. This is your "burn" - the money you spend no matter what. When you calculate "burn" you should exclude costs you will incur only against revenue. For instance, if you make shoes, you will buy shoe uppers only if you have an order for shoes. So the cost of shoe uppers should NOT be included in the burn. But the salary/rent/utilities of the shoe factory should be included.
As a thumb rule, you should have enough cash in the bank to sustain your burn for 6 - 12 months. See the formula below
Minimum Cash In Bank > = 6 x (Monthly Burn)
OR better still
Minimum Cash In Bank > = 12 x (Monthly Burn)
If you do not have enough cash in the bank, cut your burn immediately. Usual tricks - salary cuts, turn off the lights/monitors/servers at night etc. Then one of you go out and raise money while everyone else goes out and brings in the orders.
Remember: 1) A company cannot run without cash 2) Even to negotiate with a potential investor you need some money in the bank to last you through the negotiation.
For a more detailed case study on managing cash in startups follow the link below (16 pages). You can start from Page 9 if you do not have the time to read all 16 pages.
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