If you're the owner of a new startup, you should know that running out of money is one of the biggest reasons new startups fail. But your new business doesn't have to become a statistic if you pay close attention to your cash flow. Here are five ways you can manage it and give yourself the best chance of success.
1. Calculate Your Burn Rate
In order to keep a handle on your cash flow, you need to understand your burn rate right from the beginning. In a nutshell, your gross burn rate is the amount of cash you spend every month in order to keep your business running. For example, if it takes $2,000 a month to keep your doors open, that's your gross burn rate. This tells you how long your business can remain open before you run out of money. If you have $10,000 in cash reserves, and you spend $2,000 a month, you will be out of money in five months if you have no revenues.
In addition to calculating your gross burn rate, you also need to get a handle on your net burn rate, which is the amount of money you lose each month if your business is not yet profitable. Do this by subtracting your revenue from your expenses. If you spend $2,000 per month and have $1,000 in income, your net burn rate is $1,000 per month. This is valuable information you can use to determine how long you can operate unprofitably before you run out of cash -- ten months in the above example. It can also be used as a guideline of when to approach investors for additional capital.
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