Are you worried your startup will run out of cash before getting it off the ground? Or maybe you are concerned about what will happen during a market downturn if the opportunity to raise additional funding slows?
With 16% of all startup failures attributed to cash flow problems, you have every right to be concerned. While starting and running a business demands cash, evaluating your expenses can reduce your business cash burn rate.
But, what is cash burn rate?
Your cash burn rate is how much you spend and how fast. When thinking about this amount, you should always keep an eye on your cash reserves and balance. It is also crucial to check how long it will take until you run out of cash (also called runway or your cash zero date) based on your current spending rate.
If your startup burns too fast or has a negative cash flow, it may go bankrupt. But if it burns too slow, it might mean it’s not investing enough and could fall behind the competitors. Either way, here are seven ways to reduce cash burn rate during times of financial crisis.
1. Carry Out An Expense Survey
Before making any major decisions or changes to your business, conduct a cash burn analysis and start tracking your startup operating expenses immediately. An expense survey can help you learn where you are spending too much, where you could be saving, and how much cash runway you have.
Perform monthly expense surveys (or expense audits) to identify ways to keep your burn under control. It's easier to cut expenses and reduce operational costs when you know what you are spending.
*Note that the cash burn rate formula subtracts the prior month’s balance from the current month’s balance and then divides the result by the number of months you are comparing. Read our blog here for more details on how to calculate burn rate.
2. Evaluate SaaS Tools And Recurring Expenses
Once your expense survey is complete, use it to help you avoid duplicate expenditures across your organization and departments — for example, SaaS subscriptions used independently by various teams but not yet under one company account. These recurring costs and subscriptions add up quickly, especially when not monitored.
As you look at the tools your teams use, determine which are essential and which are maybe “nice to haves” but could be brought in-house or consolidated. Ask yourself if the tools that you have in place are truly increasing productivity, helping your team work more efficiently, and ultimately increasing your bottom line.
3. Streamline Expense Approval Processes
One way to control your startup's outflows is to streamline your expense approval processes. Adding real-time visibility to these processes will make it easier to control costs. Your staff will get to know the kind of expenses that need approval and those that don’t.
Lay out rules that automatically allow expense claims to be approved or denied. For example, if your employee files an expense claim that fails to meet requirements, it will automatically be sent back to them, asking them to edit the claim or support it with receipts.
4. Negotiate Better Payment Terms
Negotiating better payment terms with your vendors, suppliers, and partners can give you room to save money. As you negotiate these terms, ask to move to interest-only loans to reduce the monthly loan payments or spread your payments out over a more extended period of time. While this approach does not always work, it’s best to be upfront and have these conversations with suppliers rather than defaulting on payments down the road. In most cases, if you have good relationships, other businesses you work with will be willing to work with you.
Don’t forget to seek tax or legal advice when making any decisions with long-term implications. These decisions may include changing your contractual or legal obligations with the IRS.
5. Close Unprofitable Components of Your Business
Some parts of your business may have hurt your revenue. Holding on to them will increase your cash burn rate and put you at risk financially.
Maybe you recently expanded into new markets too quickly or introduced new products and features before perfecting your existing offering. If these approaches aren’t working as planned, consider closing them. If you have a high burn rate, you wouldn’t want to spend on investments that have low returns.
Another option is to create a minimum viable product as you identify unprofitable parts of your business. The product should have adequate working features to replace those that aren’t selling. Before its launch, take time to address features or defects customers may not need or want to improve the sales.
6. Increase Your Cash Reserves
The purpose of a cash reserve is that it should only be accessed when you urgently need it. A large cash reserve can help your business survive when there's a drop in sales. But your cash reserve can only support you if you have a plan in place to grow it or a contingency where you can add more capital when needed.
Possible ways to increase your cash reserves if you expect upcoming hardships include securing new business loans, reducing inventory levels or raw materials, liquidating unused assets, crowdfunding, or leveraging some of your own capital.
7. Cut Unnecessary Overhead Costs
Overhead costs are any indirect expenses of running a business. They may be helpful or necessary but have no direct correlation with building your product or service.
A great example of an overhead cost many companies have decided to forego permanently since the 2020 pandemic is rent. According to Zippia, 66% of U.S. employees work remotely at least part-time as of 2021, and 16% of U.S. companies are fully remote.
Not renting or owning office space also decreases costs such as utilities, insurance, and office supplies. Ultimately, cost savings, especially during a recession or financial crisis, may outweigh any benefits associated with operating the day-to-day in person.
8. Consolidate Teams
Additional examples of overhead costs are salaries and wages. When your burn rate suffers, it may mean reevaluating your team for redundancies or non-essential roles. In many cases, an unfortunate side effect of financial downturns, reducing staff can also be a company’s biggest way of saving money month to month.
One area to consider downsizing is your finance department. In-house bookkeepers, accountants, or controllers manage finances and provide monthly reports for a business, but it averages $500,000 or more per year to build an entire in-house finance team. This is a more traditional approach to bookkeeping but not always the most efficient or cost-effective.
Consider looking at outsourcing a part-time fractional CFO or maximizing your savings with Zeni. With Zeni, one team, one platform, and one point of contact manages all of your finance functions that you would otherwise require multiple employees and salaries. Instead, Zeni charges a set monthly fee based on your company's total monthly expenses, starting at $549/month.
Looking to Reduce Your Cash Burn Rate? Let Zeni Help
Saving money is as lucrative as making money in a business.
Since your startup's future relies on reducing cash burn rate, the Zeni Dashboard lets customers easily view changes in cash position month-over-month (or by weeks, quarters, or years) within the Cash Position report. You can also view your expenditures by department to more deeply understand where money is coming in and where money is going out.
You can count on Zeni for real-time insights on tax, accounting, CFO services, and bookkeeping. Our AI-driven bookkeeping solution improves transparency on all financial aspects of your business.