Monday, December 5, 2011

Burn Rate

Fred posted on Burn Rate today. It's a good read--definitely go read it after this post.

But Fred's example is based on a funded company, where the amount of investment is known and up front.

For most startups, that stage is a goal we aspire to, but isn't the norm at the beginning. Instead, we raise cash here and there, hoping to get enough to run things smoothly, and maybe combine it with revenue.

With both ChiliSoft and Mission Research, I remember telling the guys "I can pay you this week, but I'm not sure about two weeks from now".

It was a tough spot to be in, but the team was loyal and knew I could usually make something happen. And I usually did.

Managing cash flow is an important practice to get to know early. It's pretty simple: you have your known ongoing expenses, known revenue (or not), and known investment (or not). You have to manage your cash--the combination of investment and revenue--to cover the expenses on an ongoing basis.

That's why hiring someone early on is such a big commitment. You're asking them to change their lives on your behalf, so you damn well better be able to make payroll.

I blew that in a big way once; I thought I had a certain amount of cash, and knew I had to contract the company to make the cash last, but then I got an email from my right-hand man informing me he had made a mistake--by $200,000. Oops is right. We laid 10 people off the following Tuesday.

Which raises another point: you're the leader, the CEO--you need to verify the numbers. I failed to do that, though my practice prior to that year was to know everything about finances. It was a mistake I still regret today.

So keep a close eye on your cash, your burn,  and your revenue. Don't apply your optimism to revenue projections and investment when making your hires, and only hire ahead of revenue if you have at least 12 months of cash for each position (your risk tolerance may be greater or less, but that's not a bad runway; I prefer 18 months but have based hires on as little as 3 months, which is nuts).

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