13 September 2023

How to reduce burn rate in start-ups?

For budding entrepreneurs, keeping burn rate as low as possible is essential for longevity and increased chances of success. Learn all about burn rate in our latest blog.

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Sharyh Murray

What is ‘burn rate’?

Whether you’re a start-up or enterprise-level business, burn rate is something you should be aware of. You also need to know how best to manage it.

So, what is burn rate? In simple terms, it refers to the rate at which a company is losing money. Gross burn rate represents how much cash a business is burning through every month, before reaching profitability.

If you’re in the early stages of business and your burn rate is high, don’t worry. New SMEs and start-ups often have a high burn rate in the early stages of business, as their focus is more likely to be on investing in growth rather than consistent revenue streams.

The importance of reducing burn rate for start-ups

Even though a higher burn rate is common in this scenario, it is important for startups, especially those reliant on investor capital, to maintain a reasonable burn rate. This is because if a company’s burn rate is too high, it may run out of money before it becomes sustainable, rendering all its potential and hard work null. A low burn rate on the other hand, allows for more time to adjust the business model and pivot when necessary.

1. Analysing your current burn rate

Analysing your burn rate is the first step to understanding how it impacts your business. Here’s what you’ll need to assess for the full picture:

Calculating your burn rate

Calculating your burn rate is simple. To do this you need to subtract your monthly revenue from your monthly expenses. The outcome will give you an idea of how quickly you're using your capital reserves or incurring debt.

Identifying business expenses

Next you’d need to identify exactly where your funds are going. Begin with listing out all your expenses, categorising them into buckets such as:

Salaries
Rent
Marketing
Business invoices
Supplies, etc.

Categorising your expenses will give you clarity on where your funds are primarily allocated.

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Monthly maintenance fees associated with an international business account.
International shipping fees
Local salaries
Taxes

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2. Identifying key cost drivers

To analyse your burn rate, you’ll need to get an overview of the key cost drivers that are contributing the most to your expenses. Here’s how:

Categorise your expenses

Once you’ve identified where you’re spending money, you’ll need to go one step further and categorise your business expenses. Group expenses into two main categories:

essential (like salaries or rent).
and non-essential (such as fancy office equipment or team outings).

Analyse your biggest cost drivers

Finally, you should take some time to dive deeper into each category, pinpointing specific expenses that are the most substantial. Understanding these will provide insight into potential areas for optimisation.

3. Optimising your team

Another important factor businesses should consider when calculating their burn rate is whether their team is optimised. Optimising your team ensures you have the right number of people with the right skills to operate efficiently.

Conduct regular skill assessments

An overstaffed or understaffed team can cause inefficiencies that contribute to a company’s burn rate. For start-ups and small to medium-sized enterprises (SMEs), regularly assessing the skills and roles of your employees to ensure balance and prevent unnecessary expenses, is important.

4. Maximising lean operations

Maximising lean operations is another important factor that impacts burn rate. It involves streamlining your processes to eliminate waste and increase efficiency. This is especially important for:

Making the most of limited resources.
Scalability with ease.
Gaining a competitive edge.

Here’s how to maximise lean operations:

Implement automation into your operations

Where possible, automate. Utilising automation tools and software not only reduces manual labour costs but also enhances accuracy and efficiency.

Analyse your processes

Regularly reviewing your start-up’s processes is important. You should aim to identify and remedy inefficiencies and bottlenecks to ensure your operations run smoothly and effectively.

5. Removing non-performing projects

Another component that makes up your business’ burn rate can be found in the form of processes and initiatives. It's important to remove the initiatives that aren’t delivering any return on your investment (ROI).

Evaluate your current projects

Assess all of your ongoing business projects against their performance metrics, ROI, and alignment with your business objectives. The aim here is to ensure that each initiative contributes positively to the business.

Reallocate resources

If a project falls short consistently, consider either revamping it or cutting it off entirely. When choosing the latter, reallocate the saved resources to areas with higher returns.

Building a burn rate reduction plan for your business

Now that we know all about what contributes to burn rate, let’s look into how you can reduce it to help your business thrive.

First things first, increase your revenue

One direct method to combat high burn rate is by increasing revenue. As a start-up, you should be innovating, diversifying, and constantly seeking opportunities to enhance income. This can be done through the following:

Fundraising

While not a permanent solution, seeking external capital can be vital for start-ups with limited cash reserves. Whether from angel investors, venture capitalists, or crowdfunding, fundraising can provide a much-needed runway.

Cost-cutting measures

You can also consider a variety of cost-cutting strategies such as:

Renegotiating contracts
Optimising technology use
Shifting to remote work setups
Improving inventory management
Refining marketing strategies

Implementing some of these strategies can help you get more out of your funds, which can be reallocated into other important areas of your business.

So, what’s the ideal burn rate for a start-up?

There is no one-size-fits-all all answer when it comes to the ideal burn rate for a start-up. It depends on several factors like the strategic objectives of the business or what stage of development they’re at. Not only this, but industries with high barriers to entry require alot of upfront investment in things like tech or infrastructure before they make a profit. Take Uber for example – it took the company over 14 years to make a profit right away.

Hassan Braha - VP of Finance at 3S Money

Ultimately, an ideal burn rate is one that aligns with a start-up’s strategic goals, considering its stage and industry. While a high burn rate might be acceptable in the initial phases, it’s crucial to constantly monitor and adjust it in response to changing circumstances.

Remember, the aim isn't merely survival, but to thrive. With vigilance and proactive management, start-ups can optimise their burn rate, ensuring they're best positioned for long-term success. So, take the steps outlined above and lay a strong foundation for your start-up’s future.

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