Risk

Five Tips for Controlling Cash Burn

For both early-stage and mature companies, it often seems growth is the top priority — at almost any cost. Without proper planning, however, that m...
Marielle SegarraJuly 25, 2013

For both early-stage and mature companies, it often seems growth is the top priority — at almost any cost. Without proper planning, however, that mindset can lead companies to burn through their cash too quickly.

Cash burn, ironically, can constrain future growth by forcing companies to stop short on spending and accept more-expensive financing to stay afloat. With this in mind, here are some ways growing businesses of all sizes can avoid and manage cash burn.  

1. Stick to Your Core Competencies. One way to lower costs before you burn through your cash is to outsource non-core functions, says John Pennett, partner in accounting firm EisnerAmper.  “You want to spend your time and your cash in the best place possible,” Pennett says. “If you have a computer programming expert and some marketing experts, that’s where you should be spending all your time and effort, not on infrastructure, legal and payroll, for instance.” Midsize companies may not need to hire full-time public relations or human resources employees, for instance. “It might be a little bit more expensive per hour or per unit, but in total you’re saving yourself a lot of money,” he says.

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2. Share the Wealth. Growing companies should also seriously consider paying partners and vendors partially in equity or royalty payments, rather than cash. “Let’s say I was going to hire someone to do website development and it was going to be a quarter million dollar project,” Pennett says. “I may not have $250,000 to spend right now. In addition to cash, I might say, ‘I’ll give you $100,000 worth of stock in my company or what I think is going to be $100,000 or more of royalty payments down the road.’”

Profit-sharing and equity payments not only save cash, but they also give employees an incentive to see the company succeed, says Anthem Hayek Blanchard, chief executive officer of Anthem Vault, a gold and silver bullion retailing and storage company that launched in 2012. “Anytime you have more participants advocating for the company and trying to work in the company’s best interest, it’s going to increase probability of success,” Blanchard says. This strategy is not only useful for early-stage companies. “A good company is really always looking for more capital,” he says. Mature companies can’t use this technique as liberally, though, because their equity will become diluted as it is spread too thinly, he adds.

3. Don’t Have Tunnel Vision. Too many growth companies are focused solely on profit without considering cash flow, says Gregory Wank, accounting and advisory partner at Anchin, Block & Anchin. “I have a client who just raised a million dollars last fall. They did their operating budget for 2014 on a profit and loss (P&L) basis, not on a cash-flow basis. So I said to them, ‘based on a P&L, when are you going to run out of money’? And they said they had no idea.” Firms should give equal weight to cash management, remembering that they “have a finite pool of cash, and they should have a reasonable expectation of what they are going to spend and what their sales are going to be,” Wank says. 

4. Cut Costs. If a company realizes it is running out of cash, it should manage its expenses, reevaluating things like whether it makes sense to make a new hire, Wank says. “That’s usually the biggest ticket – the payroll and the consultants. That’s something you need to stay on top of and maybe delay if you need to,” he says. “Anything that’s focused on the future has to ultimately be slowed down,” says Blanchard. “The focus has to be on the present in order to correct the present situation of too much cash burn.”

5. Renegotiate Early. Once companies have cut expenses and still need more cash, they need to obtain additional financing. But whenever possible, they should do so far in advance. “You can’t wait until you wake up one day and say ‘oh my God, I’m going to run out of money next month,’ and then go out and try to raise more money,” Wank says. When companies wait too long to renegotiate, they lose their leverage and can only secure financing at a high cost, he says. “What typically happens is you go to your existing investors and you say you need more money, and then they can dictate the terms to you, because you’re desperate,” he says. “Typically one or two of the investors steps up and comes up with that money, but on very expensive terms. They want a very high coupon rate or a double-digit interest-rate return, plus equity.” Instead, companies should go to investors and say, for instance, “‘in 18 months, I’m going to need more money, this is why, and this is where the money is going to go,’” says Wank. “It becomes a much more enticing thing to a potential investor because you’re not so desperate.”