Why ‘Burning Cash’ Should be Avoided by Startups – Whether Funded or Not?
Cash burn is the rate at which a new company utilises its cash resources or capital before producing a positive cash flow. The burn rate is expressed as the amount of capital used by the company in one month.
Photo Credit : ShutterStock,
Even when the startup era in India is growing leaps and bounds enticing huge investments from funders, the way some of these startups are using their savings has raised a question mark about their sustainability yet again.
When we talk about startups, a picture of an inexperienced young leader comes to our mind although the founder of the startup is not necessarily a greenhorn. If the founder is new in the business, he lacks the requisite experience to calculate how much to spend in the initial years to build his startup and to make it large.
Let us have a look at what burning cash means in terms of business. Cash burn is the rate at which a new company utilises its cash resources or capital before producing a positive cash flow. The burn rate is expressed as the amount of capital used by the company in one month.
In India, even though the burn rates are high, the entrepreneurs are less concerned about curbing their cash outflow despite knowing that the next round of funding might be too far in the future.
Startups raising a couple of million dollars in rounds of funding is not going to happen again anytime soon as poor capital intensity kills returns. So, entrepreneurs should maintain their focus on building businesses the right way and take an axe to cash burn rates.
A few companies are success driven at a really early stage that makes them brand conscious. Consequently, they start burning money on marketing rather than polishing their products at an early stage.
It is important for your calculation to know the difference between Gross and Net. More so to have an insight of your burn rate comprehension. A startup's gross expenditure includes all the expenses it is making regardless of any other criteria whereas net expenditure is its expenses minus the profit. Most Venture Capitalists and entrepreneurs pay attention to the net burn rate number, but one has to keep in mind the overhead expenses because if profits drop, you will either have an exponential increase in the net burn rate, decreasing your cash in hand or you’ll have to reduce your gross burn rate to compensate for the profit loss to keep your net burn rate the same.
One should remember, not all burn rate spending is good or bad. Sometimes, the cash outflow helps the startup to grow and in other cases, the forgone opportunity cost of that decision comes in the picture. As the head of your business, the difficult decisions of what to spend money on and how much to spend are ultimately up to you decide.
Hence, if a business person is inclined towards burning cash, he must have enough liquid capital to keep his startup going otherwise the cash burn will misfire and have an adverse effect. The entrepreneur who is aiming to make it large ought to know the key figures so that he can keep a healthy eye on his overall operations.This article has been contributed by Pulkit Jain, founder of LegalRaasta & TaxRaahi – an online portal for Company Registration, trademark registration, itr filing & tds return
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house
Around The World