Everything I Learned About Business… Cash Burn Rate
In grad school I really appreciated the fact that I had business experience before attending class. I think it added to the depth of my understanding of the things we discussed. And the experience I gained operating my own business inspired a number of great classroom conversations.
Thinking about those conversations and what I learned (the hard way) as an entrepreneur led me to a new blog idea. Each week I will (try) to touch on what I consider essential business survival topics.
Cash Burn Rate
My first major lesson in business was in discovering the concept of “cash burn rate”, or the rate at which cash is expended to support business functions. When a business grows (or expends cash) faster than receivables come in, excessive burn rate created by rapid growth can actually kill your business. Simply put – success is good, but rapid success is dangerous.
In establishing my business I worked so hard to succeed that the rapid growth I encountered nearly put me out of business… Most businesses fail because they are not properly funded. But to go a step further, in addition to adequate cash reserves, credit is key to a startup’s success. This is even more important now as we face a global “credit crunch“. Access to credit could give your firm a strategic advantage over competitors.
Some types of credit are less obvious than others. Traditional bank financing (i.e. a business line of credit) is what most entrepreneurs seek. Less obvious are home equity lines of credit, credit cards, the so called “3 ‘F’s” (friends, family and fools), and factoring.
Factoring is a means to sell receivables to a 3rd party for a modest discount. Had I known about factoring when I was self-employed, my life would have been much easier. Purchase Order Funding is a relative to factoring. For manufacturing businesses, P.O.’s issued by credit-worthy firms can be sold to investors for cash so that materials or equipment can be purchased to fulfill the order. This is usually critical for small businesses that receive an order larger than normal from bigger firms.
Absolutely last in the list of sources of funds should be Venture Capital. Venture Capitalists rely on a steady stream of leads to pick the safest business ideas for funding. The reality is that an extremely small number of business opportunities presented actually get funded. And the dirty secret of Venture Capital is that the money usually comes with a replacement of management (i.e. YOU!).
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