A windfall burning a hole in your pocket. Money to burn. Your business “on fire.” Most metaphors linking fire with money insinuate that money is in abundance. But one that your business should watch out for is “cash burn.”[1] Here’s why.

What is cash burn?

Quite simply, cash burn refers to how much cash you burn through each month. “Gross burn” is the total amount you are spending each month, and “net burn” is the amount you are losing per month (the difference between cash in and cash out). Often net burn applies to startups who are existing on the amount they have raised while they prepare to bring their product or service to market.

So, for example: If you started your company with a loan or start-up funding of $500,000 and spent $100,000 a month (before income):

  • Your “burn rate” is $100,000 (the amount "burned" in this case, monthly)
  • Your “runway,” or the amount of time before your existing cash is depleted, is five months.

As you can see, it’s vital for companies to temper their cash burn[2] to maintain stability.  

Stop fanning the flames of cash burn

How can help you monitor—and ultimately slow—cash burn? Here are five strategies to keep in mind.

1. Create a solid business plan with key financial factors detailed.

While this strategy won’t immediately stop cash burn, it will help keep you on track to take any necessary cash burn in stride. Using the example above, if you have five months’ worth of capital available, you need to have a firm grasp on how you will replenish it when it’s gone. Knowing that you are expecting to reap a profit[3] from sales that will materialize three months from now can make you feel far less anxious about your cash burn this month and next because you know that it’s expected, and you have a plan to staunch it.

2. Develop a budget—and track it.

As a small business, it’s vital to keep a sharp eye (and pencil!) on your expenses, so you aren’t inadvertently spending too much money in specific categories. For example, you might see that you have too many subscriptions and need to cancel a few, or that you should make an effort to lower utility bills or call around to get a better rate on WiFi or other essential services.

3. Minimize operating expenses.

A budget can help you identify smaller outlays, but it might be time to turn your attention to the bigger-ticket items, like office space. If you’re spending premium dollars on an elaborate office, you might decide that a coworking space would offer everything you need. Wages and salaries also fall under the “operating expenses” category, so take a hard look at your team and make sure that each is performing in their highest and best capacity. Are there tasks you can outsource to a freelancer, rather than hiring a full-time employee (thus assuming the costs of their associated benefits and tax implications)? Or perhaps a valued employee could learn a new skill which would allow them to do double duty.

4. Create a better invoicing procedure to get paid faster.

The best way to help stop cash burn is by having money coming in, so it's important to make it easy to pay you.  To help set your business up for success, develop standard procedures that you use when invoicing, including:

  • Sending invoices on the same date every month.
  • Double-checking the recipient and invoice details, to ensure it isn’t inadvertently misdirected due to missing information.
  • Including your payment terms, such as “net 30.”
  • Offering a variety of ways to pay; check with your business banker about best practices for accepting payments.
  • Following up at regular intervals when an invoice goes “past due.”

5. Collaborate with your banker on what products and services can minimize the burn.

Finally, remember that your business banker works with many companies just like yours and can offer solutions and advice to minimize cash burn. Contact us today to find out what products and services might help extinguish the burn.

To learn more about what PNC can offer your small business, visit pnc.com/smallbusiness.