How to reduce your cash burn rate

working capital management

Help take control of your business during a crisis by working out how much cash you have left. If you know when you’ll have zero cash, you can prioritise your next steps.

If your business is suddenly facing a crisis that’s causing a large unexpected drop in sales that’s outside your control, you may find yourself in a negative cash flow situation. There are a few ways you might be able to proactively help improve this ‘cash burn’ situation.

Calculate your cash zero date

This isn’t as hard as it sounds. Work out the cash burn rate compared to your net working capital to help calculate how many weeks or months you have to make key decisions until either your cash reserves are gone, or you need to access additional funding to help you recover.

First, add up all your existing weekly expenses. Then, depending on your current sales level, calculate how much money you are ‘burning’ or losing each week. Divide this weekly cash burn into the amount of cash reserves you have to calculate the number of weeks until you run out of cash if everything remains the same. Your sense of urgency and the time you have left before your cash reaches zero will likely be directed by this number.

There are four ways you might be able to help extend this time frame: reduce the burn rate, increase cash reserves, delay payments, and seek more revenue streams.

1. Reduce the burn rate

Depending on how the crisis has impacted your business, you may be able to reduce some expenses (while still ensuring that you are able to operate). Some things you might be able to do to achieve this could include:

  • cut all unnecessary overhead costs
  • negotiate lower rent
  • reduce staff hours or numbers
  • change monthly plans to lower rates
  • close parts of the business
  • collaborate with businesses by sharing staff, equipment, or POS systems.

Go through your last few months of invoices and credit card statements to help you see what expenses could be cut. There are probably a number of expenses in your business that you could do without and now is a perfect time to cut or reduce them after careful consideration, and advice from the appropriate experts, e.g. advice on NZ employment law.

2. Increase cash reserves

The more cash you have in reserve the longer you can ride out a dip in sales. But if the crisis looks like it will be lengthy, and you know current operating cash will run out before you project a recovery in sales, you may need to access additional funds. Traditional methods like business loans, overdrafts, and adding in more of your own capital are potential options. It could also be useful to identify other ways to potentially increase your cash reserve balance:

  • liquidate unused assets
  • reduce stock levels
  • clear out obsolete raw materials
  • crowdfund or seek external investors
  • re-invest in the business using past retained profit
  • access Government subsidies or grants.

It’s sensible to have contingencies in place to access working capital if you need it, allowing your business to continue to trade when the crisis ends.

3. Negotiating payment terms

You might be able to negotiate part-payments or deferred payments with your suppliers, until your business recovers. In the short term, you could consider:

  • moving to interest only loans
  • asking suppliers to part-pay or pay at a later date
  • asking to delay any rent or lease costs
  • contacting Inland Revenue to defer tax payments if that is an option open to you.

4. Identify alternate revenue streams

Some businesses are able to find new revenue, even temporarily, by adapting or changing how they do business. It could be possible to move parts of your business online, start a joint venture with other businesses who are still trading, identify new customer segments, or reinvent the business and look for a new market.

With any crisis, take the time to plan what your business can do to weather the storm, and review your business continuity planning to reduce the impact of future events.