If we go with common belief and statistics, the general feel of a startup venture is that 90% of these dreams fail and shut down even before the idea goes public.
However, most of these failures cannot be attributed to a poorly thought out idea. It's almost always poor execution of that idea which went horribly wrong. There could be a dozen reasons why a newly emerging business just cannot make it beyond a thought on paper, but the most common and most overlooked cause is a quick and unprecedented cash burn.
Funding is what makes or breaks a venture and once that source of funds is attained, the entrepreneur's attention must shift toward managing and handing that cash reserve with utmost care. This can primarily be done through:
- Managing your cash flow
- Keeping a track of all expenditure
- Limit overhead expenses
- Always maintain a reserve of cash
- Chalk out attainable financial goals
The primary reason behind a venture running out of cash is a high cash burn rate. By burn rate we mean the reserves of cash spent (gross) or the reserves lost (net) per month.
To start a venture, the first thing an entrepreneur does is track down the source of funding and financial investment. Once this is done, the founders must ensure the following to reduce the burn rate and plan better by ensuring these key elements are taken care of.
Minimize or eliminate overhead costs
Once your venture capitalist has entrusted you with their investment, chalk out a plan to cut down on overspending on secondary expenses like office decor, flashy equipment, or elite designers.
Even though you have managed to secure funding for the business, spending smartly and cautiously is the key here.
Whenever money is spent on a resource or service, the entrepreneur must ensure that each rupee invested is resulting in the growth of the business. The focal point here is to drive more returns per unit of investment. Strategic expenditure at the initial phases will reduce cash burn in a venture. Buying the most state of the art resources is not always a compulsion to attract investors and clients.
Every bit of cash spent on equipment or human resource must be evaluated and focussed towards the growth of the business.
Hiring only those staff and team members, who are needed for current and immediate roles, is important to reduce initial cash burn. For instance, recruiting a marketing team without establishing a minimum viable product (MVP) will be a sheer waste of finances. Instead, if accounts and admin work is becoming tough to handle, it would be wiser to hire an office management team.
Premature hiring is one of the primary reasons why new ventures burn through their finances as immediate needs are overlooked and unnecessary positions are spent on. In addition to this, startup owners should be wary of underperforming or weaker employees and nit hesitate to terminate their services, since paying them will only eat up on revenues with no returns.
Create a minimum viable product
Estimating the market pool or customer base before launching the product or service is by far the most practical approach to optimize finances and control cash burn. Thus needs to be done even prior to identifying your funding source. This way founders can concentrate on funding priority aspects such as product enhancement, updates, alterations and more, in accordance with what the market requires.
Lack of an MVP will be like building up towards an unknown and unproven product leading to creating something which may not actually have market value or scope to generate revenues.
Opt for co-working spaces
Choosing the most financially feasible place to operate from is a tough decision. However, the best way to ensure that the office space investment does not eat up into your cash funds is to curb expenditure on elaborate and costly work setups.
Instead of overspending separately on lease agreements, office equipment, decor, furnishing and the rest, more entrepreneurs are now turning to co-working spaces to reduce cash burn on these costs.
The cost of these office spaces will be shared with other startup ventures and provide ample office equipment, amenities, and basic furnishing needed to kick start the job. Co-working areas are by far the best solution to unwarranted initial expenditure on workspace, and allows the business to focus more on strategies, planning and increase its functional capacity.
Be thoughtful! You are the leader and you need to understand how to manage the finances wisely when you do not have a steady revenue stream. Not only will it ensure good financial health, but will also improve investor confidence, and the overall operational capability of your startup. This will ensure that the rood to self-sustainability is smooth.
Be wise! Spend smartly!
For in-depth startup advice which make a difference, follow AsiaTechDaily.