If you haven’t heard of the term before, “burn rate” is a measurement of how fast your company is using its cash to finance overhead before you’re actually generating positive cash flow from operations. You may have heard of it in the context of startup spending, but it’s also an important measurement for small businesses, too. Taking into account your business’ burn rate can help you plan for anticipated liquidity, or make the necessary preparations for the lack thereof.
There are ways to manage your business’ burn rate in a way that helps you prudently allocate and track incoming and outgoing cash. Here are three smart and simple approaches to help you better manage your small business’ burn rate.
1. Open a Line of Credit, But Only Use It When You Need It
Financing can be a critical component of a small business’ cash flow. There are times when large capital expenditures must be made in order to keep your business running, and you’ll need access to credit to keep it going. When the time comes when you need credit, the strategy is to know your cash flow needs for the year, but limit your borrowing to smaller increments only as needed.
The Small Business Administration points out that lines of credit can offer lower interest rates and greater flexibility than a lump sum loan. Closing costs are typically lower, and you’ll only be paying interest on the cash you take from the loan, not the total available loan itself. Much like a credit card, you might have a $50,000 line of credit, but you’re only paying interest on the money you use, not the credit available.
This may sound inconsequential, but interest payments over time can really accelerate your burn rate. If you don’t need the money today yet suspect you’ll need it for the next quarter, consider opening a line of credit now so the cash is available when you need it. This way, you don’t have to take out a lump sum loan that accrues interest even on utilized capital.
2. Save Cash by Recycling Your Resources
Being green isn’t just for your home. Your small business can reduce its burn rate when you recycle as much as possible around your office. Common office supplies like toner, printers, computer accessories (e.g. mice, keyboards, mouse pads), chairs and even paper can all add up when you’re trying to preserve your bottom line.
Keep computer accessories and chairs if they still work. Repair items like printers and computers when you can. Reduce your printing and paper waste, and you can create big savings for your bottom line.
The California Department of Resources Recycling and Recovery says offices should make simple switches, like asking staff to reduce non-essential printing, setting the printers to print double-sided and saving non-confidential printouts for use as scratch paper. If you need office furniture, like break room tables, lobby seating or other common furniture pieces, consider local charities that resell goods, like Goodwill or a Habitat for Humanity Restore location. In the course of a diligent search, you can find great, donated new and used items priced at a fraction of the cost of new furniture.
3. Evaluate What Constitutes a Want vs. a Need
Ask yourself what business expenses are wants, and which ones are needs. Even better, do this when your cash flow is positive. Defining what’s critical and what’s a luxury now can help you make smarter buying choices when the cash flow isn’t flowing. Doing so not only reduces the amount of financing you need during lean times, but it can help you better understand your business’ overall cash flow cycle.
Early Growth Financial Services warns small business owners that, “understanding where you’re spending money and being able to adapt to changing circumstances as and when you need to,” is essential. They urge that you start planning needs vs. wants, alongside cash flow, over an 18-month predictive financial model to adequately plan for and limit your burn rate. Don’t get fooled during a profitable month into thinking you’ve got cash to burn. Do the smart thing by planning for the long haul and see your small business through to lasting success.
To learn more about running your financially healthy business, continue on to our article on how to spot cash flow problems.
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