Tuesday, 29 October 2013
Startup Losses And Cash Burn. What’s The Difference?
Startup Losses and Cash Burn
Every new business will lose new money. This has to be taken as a “given”. Making a planned loss is never a problem. Making an unplanned loss and then having to try and justify it is a huge problem.
Most entrepreneurs tend to look only at the rosy and optimistic picture without recognizing the problems that will be faced and without factoring in a number of unplanned costs that will have to be incurred. Inspite of the company growing in high double digits entrepreneurs are always on the back foot with their board of directors because they had not met their over aggressive business plans. No amount of growth over previous year is relevant if one has not met the budgets. This will always cause frustration at most board reviews for the management team of the company.
It is important for every entrepreneur to understand that making money is not going to easy. Don’t believe for a second that revenues will instantly start coming in and customers will start flocking to buy your products. The reality is far different, and you will fare much better if you understand this reality and plan for it beforehand rather than get surprised later.
It is better to plan for losses and state this in your business plan. When monthly reviews are held with the board of directors, it is always better to explain how you have over achieved your numbers rather than take high targets initially and start with explaining negative variances each month.
Always remember that it is easier to “under promise and over deliver” rather than “over promise and under deliver”. A wise thing to do is to build a “stretch” in the business plan which will give you the cushion you need to handle any contingencies
No one likes to lose money and yet it is a well-recognized fact that most new businesses will lose money. Some businesses will lose money for longer periods than others because of the nature of the business and retail businesses have very long gestation periods. There is nothing to be ashamed of if your business is losing money as long as you can see the light at the end of tunnel.
All businesses will burn money and it is necessary to have sufficient funds in the bank to meet the burn. Most entrepreneurs and startups should plan for their losses and understand what the monthly burn is likely to be so that at no stage will the business run out of funds.
“Cash burn” should be defined as the amount of money that is committed to be spent each month, irrespective of whether or not a business is generating any cash flows. This is also the amount of money that is needed to be put in every month to meet the cash losses of the company. These expenses are for basic necessities such as salaries, rentals, utilities and communication costs as well as for expenses of a capital nature such as store build out and fixed assets.
All businesses will be confronted with several unplanned costs which will throw the entire cash planning out of gear and that is when the entrepreneur will have to scramble to raise additional funds.
The author is the Chairman of Guardian Pharmacies and the author of the bestselling books, The Corner Office and The Buck Stops Here. Twitter: @gargashutosh