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Entrepreneurial Toolkit #4: Taste the Cash Burn

by Randall on July 8, 2008 · 2 comments

Posted in: Business Strategy,Entrepreneurism,Investing,Social Enterprise,Startups

Cash Burn - Don't Try This at HomeWhether you run a startup (pre-revenue and running on fumes), a larger, later stage company (with actual revenues and earnings) or even a public technology company, the topic of cash should never be far from your consciousness. And, it goes without saying that keeping tabs on cash is generally even more germane in social enterprises.

For many early stage entrepreneurs, skilled in technology, marketing and strategy, the notion of vigilance around cash burn might seem mundane, something to be avoided or delegated. There is no question that companies endowed with more cash on their balance sheets can act more strategically. Conversely, It is the rare company indeed that isn’t significantly cash constrained at some part of its life cycle. As a result, you need to be on top of cash burn and not let cash crises catch you off guard.

No, not like this!

Of course your need, or even better should virtualize, solid financial and accounting management skills. Notwithstanding this, as CEO, cash needs to figure as a constant item in your personal mental checklist. In the New Venture 2.0 Playbook, discussed in much more detail in an earlier blog post here, Grover Righter has aptly dubbed the level of importance of cash as “The CEO’s Mistress” (pictured at right).

Yet, many entrepreneurial CEOs can’t answer simple, but fundamental, questions, such as:

  • what is your monthly burn?
  • what is the life of existing (and committed) cash in the business?
  • Which expenses could be cut, should I wish to extend this cash life by lessening burn?
  • What was that cheque really for?

While the Venture 2.0 Playbook outlines a complete methodology to build certain entrepeneurial technology startups, from beginning to exit for much less money, the key point of today’s post is that every entrepreneurial CEO must internalize the whole issue of cash burn. Remember, it’s not enough to sleep peacefully at night, comfortable in the notion that your CFO is handling all of that cash stuff.

And, ironically, this need doesn’t disappear even in a larger firm. When I ran a public company, portfolio manager expectation was that the CEO knew the business model, budget and forecast to a reasonable level of detail for up to 2 years into the future and also with longer term strategic thinking. Because public CEOs (and CFOs) are expected to give “street guidance” of future quarters, it feels like trying to drive a car where the steering column is very long — in this case say 18 months long. Keeping all of this in your head can be challenging. And, furthermore as you discussing product, market and strategic questions, all may well have financial implications. In other words, even minor adjustments in one area of the business can significantly alter the “18 month steering” problem of future financial guidance.

To summarize, for the entrepreneur without formal financial training, seriously consider upgrading your financial skills (by formal training, finding a good mentor or via your own research). And, even more important, take them to heart – particularly in the area of cash management.

About Randall

Randall Howard is a serial entrepreneur and long term technologist with a passion for social innovation.

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